Indian government bonds are exhibiting range-bound behavior as of Tuesday, December 2, 2025, weighed down by a combination of factors including a large supply of state debt and a weakening rupee. The benchmark 10-year yield is hovering around 6.56% as market participants await further cues from the Reserve Bank of India's (RBI) upcoming policy decision.

The market is facing downward pressure due to state governments planning to raise funds through bond sales. An increase in the supply of debt typically leads to lower bond prices and higher yields, as investors demand a greater return for holding the increased debt. Today, traders are bracing for a heavier-than-scheduled state debt supply. New Delhi is also expected to raise 300 billion rupees through 5-year and near 50-year bonds on Friday.

Simultaneously, the Indian rupee has been under pressure, hitting a lifetime low. A depreciating rupee makes holding Indian bonds less attractive to foreign investors, as it reduces their returns when converted back to their home currency. The combination of increased state debt supply and a tumbling rupee is dampening investor sentiment and keeping bond prices subdued.

Market participants are closely monitoring the RBI's upcoming monetary policy decision for potential direction. The central bank's stance on interest rates and its approach to managing liquidity in the market could significantly influence bond yields. Some analysts believe that increased on-screen purchases by the RBI might take the 10-year yield to 6.47%-6.50% levels. The focus is also on the Federal Reserve's meeting minutes due Wednesday, for cues on the U.S. rate-easing trajectory, which will likely have a bearing on India's rate cut path, traders said.

Traders are growing wary of a supply glut, particularly in longer-duration securities, prompting them to hold off on building large positions. Consequently, the yields on the 40-year 6.90% bond and near 50-year 7.09% 2074 bond are at all-time highs since issuance at 7.3867% and 7.44%, respectively. Bond market participants have also been paring positions in the last three sessions, as conviction grows that recent purchases by the RBI were to replace maturing debt rather than to push yields lower.

The yields on longer-duration bonds have already hit record highs due to supply concerns. The yield on the benchmark 10-year note was at 6.5374%. The 10-year yield briefly rose above the key 6.55% level, but strong buying capped further upside. Indian states are set to borrow 136 billion rupees ($1.53 billion) through a sale of bonds later in the day.

Given these factors, bond traders are exercising caution and refraining from taking large positions. The market is expected to remain range-bound in the near term unless there is a significant change in the supply-demand dynamics or a shift in the RBI's policy stance.