Why Are 10-Year Bond Yields in India Sticky Downwards Despite RBI’s Easing?
The 10-year Government of India bond yield is a key barometer of long-term borrowing costs for the economy. When the Reserve Bank of India (RBI) cuts rates or infuses liquidity, yields are expected to fall, making borrowing cheaper. However, despite multiple rate cuts and dovish signals, the benchmark 10-year yield has remained stubbornly above the 6.50% mark — puzzling economists and debt market participants alike.
Let’s explore why yields have not softened further, even though monetary policy has been supportive.
After the June monetary policy, the RBI reduced the repo rate by 100 basis points (bps) cumulatively this year, and also lowered the Cash Reserve Ratio (CRR) to release additional liquidity. Yet, yields stayed elevated. The central bank’s stance was changed to ‘neutral,’ signalling flexibility — but investors remain cautious due to fiscal and global factors.
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The key reason for sticky yields lies in investor sentiment. Market participants expect higher fiscal borrowing due to lower GST collections, elevated inflation expectations, and rising global bond yields. The demand for long-term bonds has been moderate as traders expect a higher supply of government paper, putting upward pressure on yields.
Key Factors Influencing 10-Year Bond Yields
| Factor | Impact on Yields | Explanation |
|---|---|---|
| RBI Rate Cuts | ↓ Expected | Should lower yields by making borrowing cheaper |
| Fiscal Deficit Concerns | ↑ Actual | Markets expect higher government borrowing, offsetting RBI’s easing |
| GST Shortfall | ↑ | Reduced state revenue pressures bond supply upward |
| Global Yield Trends | ↑ | Higher US yields influence Indian bond pricing via foreign flows |
| Liquidity Infusion (CRR cut) | ↓ Expected | Improves liquidity but sentiment-driven selling limits gains |
Investors also consider the rupee’s trajectory when pricing bonds. A weakening rupee increases the probability of imported inflation and discourages foreign investors from holding rupee-denominated bonds. The depreciation expectations lead to a demand for higher yields as compensation for currency risk.
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Understanding the Terms
- Bond Yield: The annual return an investor earns from a bond. Inverse to bond prices — when yields rise, prices fall.
- Basis Points (bps): One-hundredth of a percentage point. For example, 50 bps = 0.50%.
- CRR (Cash Reserve Ratio): The percentage of deposits banks must keep with RBI, which affects liquidity.
- Fiscal Deficit: The gap between government spending and revenue, financed through borrowing.
- RBI Repo Rate: The rate at which the central bank lends money to commercial banks.
SWOT Analysis of India’s Debt Market
| Strengths | Weaknesses | Opportunities | Threats |
|---|---|---|---|
| Strong domestic demand base and active RBI management | Limited foreign investor participation due to currency risk | Potential inclusion in global bond indices | Rising global yields and fiscal slippages |
Managing bond yields and currency simultaneously is a delicate balance. RBI faces the challenge of injecting liquidity without triggering inflation or further rupee weakness. This makes yield management a function of both monetary and fiscal credibility.
Investor Takeaway
Indian-Share-Tips.com Nifty Expert Gulshan Khera, CFP®, who is also a SEBI Regd Investment Adviser, believes that India’s bond market resilience is both a reflection of cautious optimism and fiscal prudence. With inflation expectations contained and RBI maintaining liquidity, yields could gradually soften — but any fiscal slippage or global rate rise will limit the downside. For now, investors in debt mutual funds should prefer short-to-medium duration strategies over long bonds.
Discover more expert-backed analysis and actionable insights at Indian-Share-Tips.com, which is a SEBI Registered Advisory Services.
Related Queries on Indian Debt Market
- Why Are Indian Government Bond Yields Not Falling Despite Rate Cuts?
- How Does Fiscal Deficit Impact 10-Year G-Sec Yields?
- Should Investors Prefer Short Duration Debt Funds in 2025?
SEBI Disclaimer: The information provided in this post is for informational purposes only and should not be construed as investment advice. Readers must perform their own due diligence and consult a registered investment advisor before making any investment decisions. The views expressed are general in nature and may not suit individual investment objectives or financial situations.
