Bond Market in India – Rising Bond Yields Amid RBI Rate Cuts

Bond Market in India Latest News

• India’s 10-year benchmark government bond yield has risen by about 26 basis points in the past month, despite the Reserve Bank of India (RBI) cutting the repo rate by 100 basis points over seven months. 
• This divergence signals investor unease in the bond market in India over inflation, fiscal risks, and government borrowing requirements.

Bond Market in India

• Meaning: 
  • The bond market in India is a structured space where governments, companies, and public sector organisations raise money by issuing bonds. 
  • The bond market is not just a place for investors to park their money—it plays a vital role in keeping the Indian economy running smoothly. 
• Importance:
  • Funding the nation’s development: Example, when the government needs money to build roads, schools, hospitals, or even invest in green energy projects, it issues bonds. 
  • Fueling business growth: Corporate bonds allow businesses to raise money for expansion, new projects, or even to manage existing debt more efficiently.
  • Shaping interest rates: The bond market plays a key role in guiding interest rates. Bond yields—the returns investors expect—act as a benchmark for interest rates across the economy.
• Types of bond markets in India:
  • Primary bond market: 
    • When a company or government needs funds, it issues bonds for the first time in this market. 
    • Investors purchase these fresh bonds directly from the issuer, providing immediate capital for the issuer’s projects. 
  • Secondary bond market:
    • It allows investors to buy and sell previously issued bonds among themselves. 
    • Prices in the secondary market fluctuate based on interest rates, issuer creditworthiness, and broader economic trends, offering both opportunities and risks for investors.
• Key types of bonds one can invest in:
  • Government bond market: The government issues various types of bonds, such as –
    • Treasury Bills: Short-term securities with maturities up to one year, ideal for those seeking safety and quick returns.
    • G-Secs (Government Securities): Long-term bonds with maturities from 2 to 30 years, often used to fund major infrastructure projects.
    • State Development Loans (SDLs): Bonds issued by state governments for regional development.
  • Municipal bond market: State and local authorities issue municipal bonds to finance public infrastructure like water supply systems or urban transport. 
  • Corporate bond market: While these bonds carry higher risk compared to government bonds, they also offer higher coupon rates, providing an opportunity for greater returns.
• Regulation: Government bonds are regulated by Reserve Bank of India (RBI) and Corporate bonds are regulated by Securities and Exchange Board of India (SEBI).

‹ ›

Key Developments in Bond Market in India

• Bond market dynamics:

• • 10-year bond yield: Rose from around 6.34% to 6.60% despite rate cuts.
  • General expectation: Bond yields fall when repo rate is cut; current rise shows investor concerns.
  • Implication: Rising yields leads to falling bond prices, reflecting selling pressure.

• RBI’s policy stance:

• • RBI adopted a hawkish stance on inflation despite lowering rates.
  • Monetary Policy Committee (MPC) kept key rates unchanged:
    • Repo Rate: 5.50%
    • Standing Deposit Facility (SDF): 5.25%
    • Marginal Standing Facility (MSF): 5.75%
  • Growth forecast: 6.5% for 2025–26.
  • Inflation forecast: Revised down to 3.1% for 2025–26, but projected to rise to 4.9% in Q1 of 2026–27.

Yield Curve and Market Interpretation

• Steepening yield curve: Long-term yields rose more sharply than short-term yields.
• Investor expectation: Higher future borrowing costs.
• Mutual fund outlook: RBI prioritising inflation control over growth revival.

GST Reform and Fiscal Concerns

• Proposal: Rationalisation of GST from 4 slabs (5%, 12%, 18%, 28%) to 2 slabs (5%, 18%), plus 40% for sin goods.

• Market concern:

• • Possible revenue loss of ₹50,000–60,000 crore.
  • Risk of fiscal slippage and higher borrowing needs.
• Effect: Increased government borrowing would result in higher bond supply and rising yields.

Possible Corrective Measures

• Government borrowing strategy: Shift to short/medium-term borrowing.

• RBI interventions:

• • Open Market Operations (OMOs): RBI buys long-term bonds to reduce supply and yields.
  • Operation Twist: Simultaneous buying of long-term bonds and selling of short-term ones.

Forward Outlook

• No immediate rate cuts likely due to inflation trajectory.
• If inflation eases further, RBI may adopt a growth-supportive stance.
• This could revive long-duration bonds and ease yields in the medium term.

Conclusion

• Going forward, the bond market in India will hinge on how effectively the RBI balances inflation management with the government’s fiscal consolidation efforts. 
• Prudent borrowing strategies and timely policy interventions like OMOs or Operation Twist can stabilize yields and create space for growth-supportive measures once inflation risks ease.

Source: IE