Indian government bond yields are expected to remain largely range-bound in early trading today, as market participants await the fresh supply of debt through the weekly auction. The yield on the benchmark 10-year bond is likely to fluctuate between 6.36% and 6.38% until the debt auction. On Thursday, the yield closed at 6.3735%.
The government is scheduled to sell 15-year and 40-year bonds worth a total of 320 billion rupees ($3.65 billion) later today. According to a trader at a private bank, significant movement is unlikely before the auction, with any reaction depending on the demand and cutoffs. It is also expected that the benchmark bond yield will be protected around 6.38%, making attempts to surpass it unsuccessful.
The primary focus will be on the Reserve Bank of India's (RBI) monetary policy decision, due on August 6, where the authority is expected to maintain the status quo on rates, according to a majority of economists polled by Reuters.
A drop in June retail inflation to a more than six-year low had initially increased bets for an August rate cut. However, these bets decreased after RBI Governor Sanjay Malhotra stated that the bar for further easing is now higher than it would have been if the stance was still "accommodative". The central bank shifted its stance to neutral while cutting the benchmark interest rate by 50 basis points at its last meeting in June.
Earlier this week, the Federal Reserve maintained the status quo on interest rates, and hawkish comments from Chair Jerome Powell reduced the chances of a rate cut in September.
India's overnight index swap (OIS) rates are expected to remain largely range-bound, mirroring bond yields, as they await fresh cues on interest rates. The one-year OIS rate ended at 5.51%, and the two-year OIS rate finished at 5.47%. The liquid five-year OIS rate settled at 5.73%.
The Indian bond market has been relatively calm, with the 10-year government bond yield trading in a narrow range of 6.3% to 7.1% since mid-2024. This range-bound behavior is shaped by dovish central bank policies, global liquidity trends, and fiscal discipline, creating a unique environment for tactical positioning. While long-term investors remain cautious, short-duration debt instruments now offer a compelling balance of yield, liquidity, and risk mitigation. Since April 2025, the Reserve Bank of India (RBI) has maintained an accommodative stance, cutting the repo rate by 50 basis points to 5.50% amid inflation easing to 2.5%. Simultaneously, the U.S. Federal Reserve's rate-cutting cycle and the inclusion of Indian bonds in global indices have attracted $20–40 billion in foreign inflows, stabilizing yields. Domestically, fiscal consolidation—reducing the fiscal deficit to 4.4% of GDP—has eased supply-side pressures, ensuring bond prices remain resilient.
The yield curve inversion—where short-term rates approach long-term levels—has unlocked asymmetric opportunities. For instance, 1-year government bonds now yield 5.8%, just 40 basis points below the 10-year benchmark. This compression reflects the RBI's liquidity injections and repo rate cuts, which have steepened the short end of the curve.
