India's bond yield premium over US Treasuries has narrowed to its lowest level in over two decades, eroding the extra return foreign investors gain from holding Indian debt. This comes as US 10-year Treasury yields surpassed 5% for the first time since 2023, while Indian markets were closed for a holiday. Local yields are expected to rise when trading resumes, as the RBI plans to drain 1 trillion rupees ($10.5 billion) from lenders via bond sales to address a massive cash surplus in the banking system that poses inflationary risks.

August inflation data accelerated, moving closer to the top of the RBI’s 2%-6% target range, reducing the scope for the central bank to keep rates on hold. The narrowing yield gap may test the RBI’s ability to insulate borrowing costs from global markets, with Indian debt needing higher local yields to remain attractive. Meanwhile, India’s benchmark Nifty 50 slid 2.1% last week, marking its fifth straight week of losses—the longest losing run since April.

Tata Group stocks are in focus after the RBI rejected Tata Sons’ application to surrender its shadow lender status, potentially paving the way for a public listing. The NSE’s 226-billion-rupee ($2.4 billion) IPO could strain market liquidity, drawing funds equivalent to 2.1 times the average weekly net demand for listed shares. Realty stocks tumbled nearly 7% last week amid rate-hike fears driven by oil prices above $100 a barrel and rising US Treasury yields.