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Bond yields hit one-year high: Is 7% the next stop if war drags on?The rise in bond yields has been driven by multiple factors. Ongoing geopolitical tensions in the Middle East continue to keep crude oil prices elevated above $100 per barrel, fuelling inflation concerns. This has led investors to factor in the possibility of interest rate hikes.By Manisha Gupta  March 24, 2026, 2:16:22 PM IST (Published)3 Min ReadBond yields in India have climbed to a one-year high, with inflation risks back, and rate cut hopes fading fast.

Yield on the 10-year benchmark government bond is currently at 6.82%, after inching up to nearly 6.88% intraday in the previous session.

The move has been driven by a mix of global and domestic pressures. Crude oil prices holding above $100 a barrel, a stronger dollar, and continued foreign investor outflows are all feeding into higher yields. Even a brief pause in escalation after the US delayed military action has not changed the broader sentiment. The conflict continues on the ground, and markets are preparing for a longer period of uncertainty.

At the same time, investors are beginning to price in the possibility of rate hikes. The surge in oil prices — up nearly 40% in the past month — is expected to push inflation higher, forcing central banks to stay cautious. This shift is already visible in the rates market. The one-year overnight indexed swap (OIS) rate has jumped about 50 basis points to nearly 5.98% since the conflict began, signalling a sharp change in expectations.

There are also domestic factors adding to the pressure. The rupee, though stabilising after hitting record lows, remains weak. Foreign portfolio investor outflows continue, and demand for dollars from importers is keeping the currency under stress. Liquidity conditions have also tightened. The system has moved into a deficit of about ₹65,396 crore as of March 22, compared to a surplus of around ₹2.5 lakh crore earlier in the month. This shift is partly due to tax outflows and foreign exchange interventions.

All of this is pushing bond yields higher, with market participants now expecting the 10-year yield to move closer to 7% if tensions persist.

But there may be a limit to how far rates can move from here. As a DSP note from March 24 points out, “Indian GSec stands at 160 bps premium to repo rate, limiting the extent of where rates could be.”

In simple terms, a large part of the rate adjustment may already be in play, suggesting that unless inflation worsens further, the room for additional rate hikes could be limited.

Interestingly, this comes at a time when equity markets have seen a mild rebound, and some investors are beginning to look at adding risk again. DSP pointed to improving valuation comfort, saying, “The bond yield to earnings yield gap is now just 1%. This is an ideal zone to own stocks.”

That contrast captures the current moment well. While bond markets are signalling caution with rising yields and tightening liquidity, parts of the equity market are beginning to look more attractive after the correction.

The question now is whether the bond market is getting ahead of itself, or simply reacting faster to a shift that others are yet to fully price in. If oil stays elevated and the conflict drags on, yields could have more room to rise. But if conditions stabilise, the current spike may yet prove temporary.Continue ReadingTagsBond Marketbond yieldsFPI flowsrupeewest asia