India's benchmark 10-year government bond yield is expected to remain largely unchanged by the end of October, with an interest-rate hike by the Reserve Bank of India already factored in, while elevated US Treasury yields and crude oil are likely to keep bonds under pressure.

The median forecast in a 91bps poll of market participants sees the benchmark yield at 7.15% by October-end, little changed from the current 7.17%.

A 25-basis-point rate increase by the RBI on October 7 is largely priced into the bond market, shifting the focus to the central bank's guidance on the path of rates beyond October.

“With a 25-bp hike largely priced in, the RBI's guidance and tone will matter more than the hike itself,” said Alok Sharma, head of treasury at ICBC India. “A signal of a pause could pull the 10-year yield towards 7.10%-7.15%, while a 50-bp hike or a hawkish tone could push it towards 7.40%,” he said.

During the month, overseas cues could exert higher pressure on bonds. US Treasury yields are hovering near multi-year highs as markets price in further tightening by the Federal Reserve, narrowing the yield differential with Indian bonds and limiting the room for domestic yields to fall.

Higher US yields will also weigh on the rupee, even as elevated crude oil prices add to India's imported inflation risks. Any escalation in the West Asia conflict will likely push crude higher, and put renewed upward pressure on gilt yields.

Domestic liquidity conditions are another source of stress. Surplus banking-system liquidity has fallen sharply, while continued variable-rate reverse repo operations and potential open market bond sales could keep shorter-tenor yields elevated.

The short end is expected to bear the brunt of tighter liquidity and rate-hike expectations. Longer maturities, meanwhile, will face pressure from heavy central and state government borrowing in the second half.

“The 15-year segment could struggle because of concentrated supply, while the 10-year benefits from relatively lower supply concentration and unchanged weekly auction sizes,” said Gaura Sengupta, chief economist at IDFC FIRST Bank.

That relative supply advantage could help anchor the benchmark bond around current levels even as other parts of the curve remain under pressure.

For October, the 10-year benchmark is thus seen as caught between a largely priced-in RBI hike and relatively favourable supply dynamics in the 10-year segment on one side, and elevated US yields, crude oil, tighter liquidity and the prospect of further domestic rate hikes on the other.

Following are the estimates for the benchmark 10-year gilt yield at the end of October: