Indian government bond yields experienced a notable surge on Wednesday, August 6, 2025, following the Reserve Bank of India's (RBI) monetary policy announcement. The 10-year benchmark government security yield climbed by 9 basis points, marking its sharpest increase in nearly two years, to close at 6.42%. This level was last observed in early May.
The primary driver for this spike was the RBI's decision to maintain the policy repo rate. The Monetary Policy Committee (MPC) opted to keep the rate unchanged at 5.5 per cent, while refraining from any dovish commentary, signaling a low likelihood of further rate cuts in the near term, particularly in October.
Market participants had largely anticipated a "dovish pause," but the combination of high inflation projections and unchanged growth forecasts led to a bearish sentiment settling in. Many traders had positioned themselves in anticipation of further easing or a more dovish stance from the central bank. As these expectations were unmet, a sell-off ensued as traders recalibrated their expectations for future rate cuts.
The bond market witnessed a paring of positions as traders who had previously bet on a dovish approach adjusted their strategies. This triggered the most significant rise in the 10-year yield since October 6, 2023. The yield closed at 6.4162%, a notable increase of 8 basis points compared to the previous day's close of 6.3321%. Yields are inversely related to bond prices, so the increase in yield reflects a decrease in bond prices.
Concerns regarding global growth, high U.S. tariffs, and weakening domestic activity indicators have contributed to expectations of growth falling below forecast, potentially testing the RBI's confidence. ANZ Bank, which had anticipated a rate cut, stated they are retaining a 25-bp rate cut in their forecast trajectory, pushing it to October 2025. Bond market participants are closely monitoring developments on the global trade front to assess the impact on the Indian economy.
RBI Governor Sanjay Malhotra acknowledged concerns surrounding global growth but affirmed a positive outlook for the Indian economy. While the RBI maintained its growth forecast at 6.5%, it revised its inflation outlook to 3.1% for FY26, compared to the previous projection of 3.7%.
The overnight index swap (OIS) rates also reflected the impact of the RBI's decision. The one-year OIS rate ended nearly 7 basis points higher at 5.5075%, the two-year OIS rate rose 8 bps to 5.47%, and the liquid five-year OIS rate increased by nearly 7 basis points to 5.7025%.
Despite the rise in bond yields, the Indian rupee closed slightly stronger at 87.73 per dollar, compared to its previous close of 87.80/$1. The rupee's strength was attributed to IPO flows and mild RBI intervention, even as oil companies and FPIs maintained demand for dollars. Downward pressure on the rupee is anticipated to persist due to higher tariff threats from the U.S. India is facing the potential imposition of a 25% tariff on its shipments to the U.S. starting Friday, with President Donald Trump warning of "very substantial" additional levies due to New Delhi's oil imports from Russia.
