MUMBAI: Indian government bonds are heading into 2026 with a question mark over how much appetite there is for a ramp-up in debt supply, even after a year in which the central bank levelled the field with record purchases and 125 basis points of rate cuts.
The measures taken by the Reserve Bank of India (RBI) have helped restrain yields, but bonds are still looking at a disappointing finish to a year that included the steepest cuts to interest rates since 2019 as supply worries dilute their impact.
The benchmark 10-year yield ended at 6.5881% on Wednesday, down 17 basis points in 2025, marking a third consecutive yearly decline.
A change in the central bank’s policy stance to “neutral”, weakening demand from institutional investors amid large bond sales by the federal and state governments and a persistent decline in the rupee kept the selling pressure on in 2025.
“After the first half, demand-supply dynamics stayed in focus,” said Vijay Sharma, senior executive vice-president at PNB Gilts.
“With rate cuts behind us, this year will also face challenges in terms of supply pressure.”
BONDS LOOK PAST DOVISH POLICY PATH
Bond markets reversed course mid-way through the year. The 10-year yield dropped 45 basis points in the first six months as the RBI added liquidity and began cutting interest rates, before giving up 28 bps of that in the second half of the year.
The central bank infused 11.7 trillion rupees ($130.17 billion) into the banking system through 7 trillion rupees of debt purchases, 2.2 trillion rupees of foreign exchange swaps and a 2.50 trillion rupee reduction in banks’ cash reserve ratio.
That scale of infusion is the biggest ever for any single year.
“Open market operation purchase announcements supported the bond market, but continued pressure on the rupee kept short-term yields volatile,” said Akhil Mittal, senior fund manager – fixed income, Tata Asset Management.
The Indian rupee fell 4.7% in 2025, its worst decline in three years amid record equity outflows and the absence of a trade deal between India and the U.S.
While the central bank’s aggressive support to the bond markets helped, it didn’t fully make up for weak demand across major investor segments such as insurance companies that received smaller flows and pension funds, which diverted investments towards equity markets after regulatory changes.
Banks that were major participants in offering their bond holdings up in the RBI’s open-market operations also did not completely replenish their positions, widening the demand-supply gap.
RANGEBOUND INTO 2026
While the initial move in bond yields will be dictated by the quantum of borrowing from states, major shifts are likely to hinge on India’s federal budget and central bank monetary policy decision, both due in February.
“RBI is likely to remain on a long pause in 2026 as inflation remains benign. Rate markets are likely to remain rangebound in the near-term ahead of the Union Budget,” Avnish Jain, chief investment officer – fixed income, Canara Robeco Asset Management said.
Traders will also remain focused on liquidity and currency management from the RBI, which will set the tone for the year.
“Going into the next year with a possibility of a trade deal, return of FPIs, and continued RBI liquidity support, the 10-year bond yield will pivot around 6.30% with a range of 6.10%- 6.60%.” said Alok Singh, head of treasury at CSB Bank.
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