India bonds post worst fall in 6 months as RBI policy dashes liquidity support hopes

MUMBAI: Indian government bonds saw their biggest selloff in six months on Friday after the central bank did not announce any fresh liquidity support in its monetary policy, with the market bracing for a record supply of bonds next fiscal year.

The benchmark 6.48% 2035 bond yield rose 9 basis points to 6.7363%, jumping the most since August and rising 4 bps for the week.

The Reserve Bank of India kept its key repo rate unchanged, buoyed by a positive economic outlook and reduced pressures following trade deals with the U.S. and Europe.

While the rate pause was anticipated, traders had expected the RBI to announce measures to boost liquidity.

The bond market is back to “square one”, traders said, leaving it vulnerable to unfavourable demand-supply dynamics just as India aims to gross borrow a record 17.2 trillion rupees ($189.7 billion) in the financial year starting April 1.

“With supply outstripping demand in the bond markets, further liquidity measures like OMOs will determine the path of yields going forward,” said Ritesh Taksali, chief investment officer at Edelweiss Life Insurance.

Since February 2025, the RBI has delivered 125 bps of rate cuts, but the 10-year yield has remained near last year’s levels, while banks have struggled to pass on the cuts as deposit growth lagged credit demand.

The central bank has infused a record 11.5 trillion rupees into the banking system this financial year, but aggressive FX intervention and rising currency in circulation have blunted the impact.

The RBI governor said on Friday that the market’s focus on the size of the gross borrowing could be misleading as the net borrowing provides a more accurate assessment of the government’s fiscal position.

Rates

India’s overnight index swap rates also jumped, led by a move in the longer-end amid a panic-driven rise in paying interest from traders to hedge their investments.

The one-year OIS rate ended at 5.53%, while the two-year rate ended at 5.70%. The longer-duration five-year OIS rate jumped 10 bps to end at 6.19%.