India's yield curve in 2025 is reflecting the nation's macroeconomic confidence, influenced by factors ranging from rate cuts to the government's fiscal glide path. Bond markets have repriced across maturities, signaling near-term stability, medium-term policy credibility, and a constructive long-term growth outlook.
Rate Cuts and Inflation
The Reserve Bank of India (RBI) has been proactive in adjusting the repo rate throughout 2025. As of December 2025, the repo rate stands at 5.25%, after a series of cuts totaling 125 basis points since the beginning of the year. These cuts, driven by moderating inflation, aim to support economic growth by reducing borrowing costs and boosting consumption and investment. The latest cut of 25 bps occurred during the December 2025 meeting, aligning with market forecasts that foresee a softer inflation outlook. Economists anticipate that this might be the last cut in the current easing cycle.
The RBI projects retail inflation (CPI) to be 4.2% in the fiscal year 2025-26. This projection assumes a normal monsoon season, which is crucial for keeping inflation under control. The central bank's commitment to price stability, while also supporting growth, has allowed it to focus on the growth side of its mandate, delivering interest rate cuts.
Fiscal Glide Path and Government Borrowing
The government's commitment to a fiscal glide path, aimed at reducing the fiscal deficit and debt-to-GDP ratio, has played a significant role in anchoring long-term expectations. The Union Budget 2025-26 projected a fiscal deficit of 4.4%. The government is on track to achieve the targeted fiscal deficit, declining from a high of 6.7% at the beginning of the glide path to 4.8% of GDP in the fiscal year 2024-25. The government has set a target of reducing the debt-to-GDP ratio to 50% (±1%) by 2030-31.
In 2025, there was a shift in borrowing composition, with the government reducing the issuance of ultra-long-term bonds beyond 20 years. This move signals a strategic approach to managing debt and aligning it with long-term growth objectives.
Economic Growth and Future Outlook
India's economic growth remains robust, with GDP forecasted to grow 6.5% in fiscal year 2026, mirroring the growth in fiscal year 2025. This growth is supported by strong domestic demand and government capital expenditures. The RBI expects real GDP to grow 6.5% in FY 2025-26, driven by increased consumption and government infrastructure spending.
Several factors contribute to this positive outlook: resilient capital markets, a dynamic consumer base, and a globally competitive workforce. A resurgence in Foreign Portfolio Investment (FPI) flows and robust domestic investor participation have further positioned India as a long-term investment destination.
Yield Curve Dynamics
The yield on the India 10-Year Government Bond rose to 6.62% on December 19, 2025. While the yield has edged up slightly over the past month, it remains lower than a year ago. The 10-year yield has remained within a tight range, signaling stable inflation expectations, predictable monetary policy, and steady demand from investors.
The shape of the yield curve is an important indicator of investor expectations about future interest rates, inflation, and economic conditions. A steepening curve typically indicates expectations of stronger economic growth and potentially rising interest rates, while a flattening curve can signal caution about slower growth or economic uncertainty.
Challenges and Considerations
Despite the positive outlook, India faces challenges, including global trade uncertainties and the need to balance fiscal discipline with addressing immediate economic needs. External risks, such as trade tensions and US restrictions, could keep the Monetary Policy Committee (MPC) cautious, even if it eases in December. To achieve developed country status by 2047, the government and other public stakeholders must balance enhancing domestic growth drivers, attracting foreign capital, and improving external market access.
Overall, India's yield curve in 2025 reflects a combination of proactive monetary policy, commitment to fiscal consolidation, and strong economic fundamentals. While challenges remain, the country is well-positioned for sustained growth and stability in the coming years.
