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Indian bonds finished 2025 with mixed outcomes despite record interventions by the RBI. The central bank cut rates by 125 basis points and injected 11.7 trillion INR ($130.17 billion) into the system, supporting the bond market. Yet, concerns over large federal and state debt issuance, weaker institutional demand, and a declining rupee limited the drop in yields. The benchmark 10-year yield fell 17 basis points for the year, marking the third consecutive annual decline. The market now looks to 2026 with focus on budget announcements, liquidity management, and potential trade agreements.
Indian government bonds are entering 2026 under the shadow of uncertainty over investor appetite for increased debt issuance, even after a year marked by record interventions from the Reserve Bank of India (RBI) and 125 basis points of interest rate cuts. These measures helped restrain yields, but concerns about supply continued to limit their overall impact. Advertisement
The benchmark 10-year government bond ended the year at 6.59%, down 17 basis points in 2025, marking its third consecutive annual decline. A shift in the RBI's policy stance to neutral, combined with weaker institutional demand and large bond sales by federal and state governments, kept selling pressure persistent. The rupee also declined steadily, adding to market stress.
In the first half of the year, bond yields fell sharply by 45 basis points as the RBI injected liquidity and cut rates. However, the second half saw yields rise by 28 basis points due to ongoing supply pressure and weaker demand. The central bank infused a record 11.7 trillion INR ($130.17 billion) through 7 trillion INR in debt purchases, 2.2 trillion INR in foreign exchange swaps, and a 2.5 trillion INR reduction in banks cash reserve ratio.
Despite this historic liquidity support, demand from insurance companies and pension funds remained weak. Regulatory changes prompted pension funds to shift investments to equities, while banks participating in RBI operations did not fully replenish holdings, widening the demand-supply gap. The Indian rupee fell 5% over the year, recording its worst annual decline in three years amid equity outflows and the absence of a trade agreement with the U.S.
Looking ahead, bond yields will initially respond to state borrowing levels, but major movements are likely to depend on the federal budget and RBI monetary policy announcements due in February. Analysts expect the RBI to maintain a long pause in 2026 as inflation remains benign. Liquidity management and currency stability will continue to influence short-term yields. With potential trade deals and the return of foreign portfolio investors, the 10-year bond yield is expected to fluctuate around 6.30%, within a range of 6.10% to 6.60%.
Source Reuters
5th Jun, 2025
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