Indian Government Bonds Slide as Powell’s Hawkish Remarks Push Yields to 6.50%

Thursday saw a decline in Indian government bonds as the benchmark 10-year yield increased to 6.50%. Despite a recent interest rate drop by the U.S. Federal Reserve, the decline occurred because investor sentiment was negatively impacted by hawkish remarks made by Chair Jerome Powell.

Fed’s Rate Cut Overshadowed by Hawkish Tone

For the first time since December, the Federal Reserve lowered its policy rate on Wednesday, raising the prospect of two more rate cuts this year to boost the labour market. Powell, however, presented the cut as a risk-management strategy rather than the beginning of a comprehensive easing cycle in his remarks.

He emphasised that the Fed would continue to take a “meeting-by-meeting” approach, leaving markets cautious. Analysts noted that while the rate cut initially lifted hopes for bonds, Powell’s tone shifted sentiment back into bearish territory. MUFG observed that the decision carried a “slightly hawkish leaning,” especially as markets had already priced in significant rate cuts for 2026.

Following the announcement, the U.S. 10-year Treasury yield briefly dipped below 4% before edging higher again.

Global and Domestic Market Reactions

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According to the CME FedWatch Tool, the odds of an additional 50 basis points of rate cuts in 2025 increased to 82%, up from 74% before the meeting. Still, the hawkish narrative restrained enthusiasm across global bond markets.

In India, traders are also preparing for fresh debt supply. The government is set to auction ₹300 billion ($3.41 billion) of the 10-year benchmark bond on Friday, a factor that could add pressure to yields in the near term.

Swap Rates Edge Higher

India’s overnight index swap (OIS) rates mirrored the upward movement in bond yields. The one-year OIS rate rose by 2 basis points to 5.4750%, while the five-year OIS rate climbed 2.5 basis points to 5.71%. The two-year OIS rate had not yet been traded.

With the rupee trading at 88.1340 against the U.S. dollar, global cues remain crucial in shaping India’s bond trajectory in the coming weeks.

Conclusion

Jerome Powell's hawkish remarks affected sentiment and caused Indian government bond yields to rise despite the Federal Reserve's first rate drop since December. Indian markets are anticipated to experience ongoing volatility in the near future due to the impending domestic debt issuance and ongoing global uncertainties.