Bond Yields Rise Despite RBI Rate Cuts
The recent surge in bond yields in India has left many financial experts scratching their heads, especially since the Reserve Bank of India (RBI) has implemented a series of repo rate cuts. Starting in February 2025, the RBI has reduced the repo rate from 6.50% to 5.25% through multiple cuts. Typically, one would expect bond yields to fall in tandem with such rate reductions, but the reality is quite different.
As we look deeper, several factors have contributed to this unexpected rise in government securities (G-secs). In June 2025, the Monetary Policy Committee (MPC) shifted its stance from ‘accommodative’ to ‘neutral.’ This shift was interpreted by the market as a sign that future rate cuts would be unlikely, leading to a rise in G-sec yields almost immediately.
International dynamics have also played a crucial role. In August 2025, the U.S. government imposed significant tariffs on Indian goods, which led to the depreciation of the Indian Rupee against the U.S. Dollar. Foreign Portfolio Investors (FPIs) reacted by selling off Indian G-secs to cut their losses, further pushing up yields due to reduced prices.
In a bid to stimulate economic growth, Prime Minister Narendra Modi announced next-generation reforms on Independence Day, which included a reduction in Goods and Services Tax (GST) rates. Nevertheless, the anticipated positive impact on G-secs was tempered by external economic pressures.
Furthermore, Indian G-secs were expected to be included in the Bloomberg Global Aggregate Bond Index, which could have boosted their attractiveness. However, in January 2026, this decision was postponed due to operational concerns, leaving investors in limbo regarding the future of these bonds.
The Indian government's borrowing plans, announced during the Budget 2026, have also raised eyebrows. With gross market borrowings estimated at Rs. 17.20 lakh crores, investors are keen to see how this will affect the bond market. The MPC's decision to maintain the repo rate at 5.25% in February 2026, amid rising inflation forecasts, only adds to the uncertainty.
As we move through FY 2026-27, all eyes will be on the government's borrowing strategy and the issuance of State Development Loans (SDLs). Investors will have to remain vigilant and informed to navigate this complex landscape effectively.
