Why are Indian bond yields rising despite the RBI rate cuts?

Bond yields are rising due to tight liquidity conditions, high supply expectations from state borrowings, and foreign exchange interventions offsetting RBI's rate cuts.

What is the impact of liquidity on India's bond market?

Tight liquidity prevents monetary policy rate cuts from effectively lowering bond yields, as it hinders the smooth transmission of lower rates in the system.

How can India's bond market improve despite RBI easing?

Suggestions include aggressive liquidity infusion, attracting foreign investment via index inclusion, and boosting domestic bank deposit growth.

Home / Business and Economy / RBI Rate Cuts Ignored: Bond Yields Defy Policy

RBI Rate Cuts Ignored: Bond Yields Defy Policy

22 Dec

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Summary

Bond yields rose despite 125 basis points of RBI rate cuts.
Tight liquidity and high supply expectations are key issues.
Foreign exchange interventions offset RBI's liquidity measures.

RBI Rate Cuts Ignored: Bond Yields Defy Policy

Indian government bond yields have defied the Reserve Bank of India's (RBI) aggressive 125-basis-point rate cuts implemented since February 2025. Despite the policy easing, the benchmark 10-year government bond yield has risen to 6.60% as of December 2025, reversing earlier declines. This divergence stems primarily from persistent liquidity shortages within the financial system.

Market participants highlight that RBI's liquidity measures, such as open market operations, have been neutralized by foreign exchange interventions. Furthermore, a significant increase in state government borrowings, coupled with reduced participation from long-term institutional investors, has created a supply-demand imbalance. Banks are also drawing down excess statutory liquidity ratio holdings to fund lending as credit growth accelerates.

To improve monetary policy transmission, market stakeholders suggest aggressive liquidity infusion by the RBI, totaling ₹2-2.5 trillion, and stable foreign demand through index inclusion. An improvement in bank deposit growth is also deemed crucial for sustainable bond market stability. These factors are seen as essential to bridge the demand gap and ease yield pressures.