Home / Business and Economy / RBI Pause: Rate Cycle Ends, Bond Yields to Hover?
RBI Pause: Rate Cycle Ends, Bond Yields to Hover?
15 Feb
Summary
- RBI likely to maintain a pause on policy rates throughout 2026.
- Indian bond market faces a ₹2-2.5 lakh crore demand-supply gap.
- Investors advised to focus on short-term AAA corporate bonds.
The Reserve Bank of India (RBI) is anticipated to maintain its pause on policy rates for the majority of 2026. This stance is supported by projected economic growth between 6.75% and 7% for FY27 and inflation expected to remain below 4.75% for the full year.
The Indian bond market faces a substantial demand-supply gap, estimated at ₹2-2.5 lakh crore, due to a gross market borrowing target of ₹17.25 lakh crore for the current budget. While the inclusion of Indian bonds in the Bloomberg active global aggregator index could bring in approximately $25 billion, its impact may be seen later in the year or next.
The 10-year bond yield is expected to trade between 6.60% and 6.80% until March 2026, with a potential increase to 6.80%-7% if RBI's open market operations are delayed or disappointing.
Global bond yields have seen fluctuations, but their correlation with Indian bonds has weakened. Despite a rise in US Treasury yields, Indian bond markets have rallied, with the 10-year yield at 6.75% compared to 7.5% in 2022.
For fixed income investors in 2026, a strategy focusing on the short end of the curve, particularly 1-2 year AAA corporate bonds, is recommended due to higher yields and potential RBI rate cycle reversals if inflation concerns rise. Retail investors could consider gilt funds with exposure to State government securities.
