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