Will we one day see Indian yields lower than US? Uday Kotak sparks macro rethink

India’s 10-year bond yield has dropped to 6.20%, narrowing the gap with the U.S. Treasury yield to just 1.60%—a spread veteran banker Uday Kotak says is the lowest he can recall. The longtime market observer posed a bold question on X: “Will we one day see Indian yields lower than the US?”

The question is more than rhetorical. For decades, India’s yields have traded far above U.S. Treasuries, reflecting higher inflation, fiscal deficits, and investor risk premiums. But a convergence is underway—driven by foreign inflows, India’s inclusion in global bond indices, and a disciplined borrowing calendar from the government.

At the same time, U.S. yields have been pushed up by stubborn inflation and delayed Federal Reserve rate cuts, exacerbated by growing fiscal strain and weak Treasury demand.

Kotak says the answer hinges on five key factors: relative inflation, risk premium, institutional trust, liquidity, and investor sentiment—both global and domestic.

Could it really happen?

For Indian yields to fall below U.S. levels, India must achieve consistently lower inflation, a sharply reduced fiscal deficit, and a perception of macroeconomic stability rivaling or exceeding that of the U.S. The rupee would also need to stabilize or strengthen, while India’s bond market must deepen and attract sustained foreign participation.

Recent tailwinds are promising. Inflation has moderated. The Reserve Bank of India is seen gaining policy independence. And global investors are warming to Indian debt, especially with index inclusion set to trigger large passive flows.

India still carries a sovereign risk premium, its debt-to-GDP ratio remains elevated, and the rupee’s volatility adds to investor caution. Meanwhile, the U.S. dollar and Treasury market still anchor global finance—making a full yield inversion unlikely in the near term.