Borrowing costs will remain in check

India’s 10-year government bond yields have remained stable at around 6% over the past month, taking the unexpectedly large jump in inflation in May and a more hawkish turn by the US Fed in their stride. That reinforces our long-held view that borrowing costs will remain low by historic standards, primarily as a result of the RBI’s policy measures. Indeed, the central bank has made clear that its purchases of government bonds on the secondary market have become a key part of its toolkit, and it duly ramped up its bond-buying commitments by INR1.6trn (0.8% of GDP) this month. Further asset purchases will follow. The RBI has also reinforced its pledge to keep policy rates very low to support the economic recovery. To be clear, we continue to think long-term yields will rise amid a renewed jump in US Treasury yields. But the rise in Indian 10-year yields that we expect – to 6.25% by the end of the year – is likely to be much smaller than in many other EMs and the US itself.