Indian government bond yields are expected to remain range-bound as the market absorbs the impact of the Reserve Bank of India's (RBI) liquidity management operations and awaits the outcome of the weekly debt auction. The central bank's actions to withdraw liquidity from the banking system are fostering caution among investors.

RBI's Liquidity Management

The RBI has been actively managing liquidity in the market through Variable Rate Reverse Repo (VRRR) auctions. On July 18, 2025, the RBI is scheduled to conduct a seven-day VRRR auction for 2 trillion rupees, matching a similar amount maturing. This follows a previous withdrawal of 1.52 trillion rupees via a seven-day operation. These actions aim to manage surplus funds in the banking system and maintain stability in the financial markets.

The central bank uses Open Market Operations (OMOs) to manage liquidity in the banking system by buying or selling government securities. When the RBI buys bonds, it injects liquidity, increasing bond prices and lowering yields. When it sells bonds, it drains liquidity, pushing yields higher.

Debt Auction Details

The government plans to sell bonds worth 270 billion rupees ($3.14 billion) through the weekly auction. This includes a new five-year paper and a 30-year bond. The cutoff yield for the five-year bond will be closely watched to gauge the appetite for shorter-duration papers.

Market Outlook and Factors Influencing Yields

• Inflation: Retail inflation in India has eased, reaching 2.10% in June, the slowest pace in over six years. This has led to increased bets on interest rate cuts by the RBI.
• Global Cues: Traders are also monitoring U.S. inflation data and global economic developments. Potential new US tariffs could intensify global trade tensions, impacting foreign investments in emerging markets like India.
• FPI Inflows: Foreign portfolio investors (FPIs) have shown increased interest in the Indian debt market, with net investments of ₹121,059 crore in FY24, the highest since FY 2014-15.
• Government Borrowing: India is planning to borrow through bond sales nearly ₹8 trillion from April to September, which will account for 54% of the estimated gross borrowing of this value for the coming year.

Impact of RBI Policies on Bond Market

The RBI's monetary policy tools influence bond prices, yields, and liquidity. For example, when the RBI increases the repo rate, newly issued bonds come with higher yields, making older bonds with lower coupon rates less attractive, which leads to a decline in the price of existing bonds.

Bond Market Liquidity

Liquidity in the bond market is crucial for investors to easily buy or sell bonds without significantly affecting their prices. Government securities (G-Secs) are the most liquid bonds in India due to their safety and government backing. The RBI plays a key role in facilitating liquidity and market access through various initiatives, including the Retail Direct Scheme, which allows retail investors to directly purchase government bonds through an online platform.

Overall, the Indian bond market is expected to remain steady, influenced by the RBI's liquidity management, upcoming debt auctions, and evolving economic conditions.