Indian government bonds are expected to experience a lift in early trading on the last day of 2025, bolstered by healthy demand seen at a recent state debt auction. This positive sentiment is further supported by substantial liquidity infusions from the Reserve Bank of India (RBI).
The benchmark 10-year yield is forecast to fluctuate within a narrow band of 6.54% to 6.59%. On December 30, 2025, the yield on the India 10-Year Government Bond increased to 6.62%, a 0.03 percentage point rise from the previous session. While it has edged up by 0.05 points over the past month, it remains 0.17 points lower than a year ago.
State debt auctions have played a significant role in shaping the bond market. On Tuesday, Indian states collectively raised 354.50 billion rupees ($3.95 billion) through bond sales, marking the largest issuance in over three months. This substantial borrowing by states, however, has also raised concerns about a potential increase in state bond supply, which could weigh on bond prices and keep interest rates elevated. States are projected to borrow 4.5 trillion rupees in the three months leading up to March, a 60% surge compared to the current quarter.
To manage liquidity and stabilize borrowing costs, the RBI has been actively intervening through various measures. The central bank has announced plans to purchase 2 trillion rupees worth of government bonds in four tranches spanning December and January, along with a $10 billion foreign exchange swap scheduled for the following month. In 2025, the RBI has already bought bonds worth 6.5 trillion rupees, a record high, and injected 4.7 trillion rupees through FX swaps and reductions to the cash reserve ratio for banks.
These open market operations (OMOs) are intended to bridge the gap between bond issuance and demand, ensuring smoother absorption of supply. The RBI's actions reflect a clear intent to ease tightening financial conditions and prevent a rapid climb in yields.
The Indian bond market experienced a dynamic year in 2025, with contrasting trends in the first and second halves. The year began with optimism, driven by RBI rate cuts and fiscal discipline, leading to a rally in the 10-year government security (G-Sec). However, this positive momentum reversed in the latter half of the year due to factors such as rupee depreciation, concerns over the fiscal trajectory, and unfavorable supply-demand dynamics.
Despite these challenges, the Indian bond market is expected to continue its growth trajectory. Projections indicate that it could exceed $5 trillion by 2028, influenced by strong economic expansion, rising corporate demand for capital, increasing foreign investment, and strong retail participation.
Looking ahead, the global financial ecosystem is expected to remain complex, with geopolitical tensions and inflationary pressures continuing to shape markets. However, India's relatively stable interest rate environment and anticipated modest rate cuts by the RBI are expected to provide a cushion against external shocks, making fixed-income investments increasingly attractive.
