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Fiscal Policy Dominates Indian Bond Market
30 Jan
Summary
- Indian bond yields are driven by fiscal, not monetary policy.
- Bond yields expected to remain range-bound in the near term.
- Global yield increases create spill-over pressures for India.
As of the first quarter of 2026, Indian bond yields are primarily influenced by fiscal policy rather than monetary policy. Analysts anticipate that yields will remain range-bound in the near term due to a combination of domestic and global factors.
Currently, Indian Rupee bond yields are stable, supported by low inflation and cautious monetary policy. State borrowings are concentrated in the first quarter of 2026, reflecting a significant increase in State Development Loans (SDLs).
Institutional investors, including banks, pension funds, and insurance companies, show limited appetite for bonds. The central government has also adjusted its issuance mix, favoring less long-term paper, a trend states have yet to fully adopt.
Globally, yields in developed markets such as the US, Japan, and the UK are rising, creating upward pressure on emerging market bonds, including India's. Rising commodity prices also pose a risk to inflation expectations.
Market expectations suggest fiscal consolidation to around 4.2%, with a fiscal deficit of approximately ₹17 lakh crore and net market borrowing at ₹11.5 lakh crores. Any perception of fiscal slippage could impact bond prices and yields.
While the RBI actively manages liquidity, its cautious approach limits significant easing signals, thus supporting current yield levels. Upside risks to inflation, particularly from food or energy prices, could also lead to a re-evaluation of interest rate expectations.
