Indian government bond yields are anticipated to rise further, influenced by the Reserve Bank of India's (RBI) recent monetary policy decisions and commentary.
On Wednesday, August 6, 2025, the yield on the benchmark 10-year bond closed at 6.4162%, marking the highest closing since April 15. This followed a sharp sell-off triggered by disappointment over the central bank's monetary policy stance. The RBI's decision to maintain its key policy rate steady, while adopting a "wait-and-watch" approach to assess the impact of previous rate cuts, has fueled this market reaction.
Several factors contribute to this expected upward trend in bond yields:
RBI Policy and Commentary: The RBI's Monetary Policy Committee (MPC) opted to keep the repo rate unchanged at 5.5%. This decision, coupled with the absence of any dovish signals, has led to a reassessment of expectations for future rate cuts. RBI Governor Sanjay Malhotra indicated that while inflation is lower than expected, it's largely due to volatile food prices and is projected to rise by the end of the year. The central bank has also maintained its growth forecasts.
Market Sentiment: A segment of market participants had anticipated a rate cut, and the RBI's decision not to deliver has resulted in a bearish sentiment. Traders who had positioned themselves for a dovish policy have trimmed their positions, contributing to the sell-off. This recalibration of expectations has triggered the most significant increase in the 10-year yield in nearly two years.
Inflation Projections: While the RBI has revised its inflation outlook downward to 3.1% for FY26, it projects inflation to edge up above 4% in Q4FY26 due to unfavorable base effects and demand-side factors. The inflation estimate for Q1FY27 is 4.9%. These projections suggest limited room for further rate cuts, reinforcing the upward pressure on bond yields.
Global Factors: Concerns surrounding global growth and the potential impact of higher U.S. tariffs also weigh on the market. The imposition of a 25% tariff on India's shipments to the U.S., coupled with warnings of additional levies due to oil imports from Russia, add to the downward pressure.
Expert Opinions: Abhishek Bisen, Head-Fixed Income at Kotak Mahindra Asset Management Company, noted that the RBI's commentary was "neutral to hawkish" and that the bar for future rate cuts is high. He anticipates further upside for G-sec bond yields, with the 10-year benchmark likely to trade between 6.3% and 6.45%. Another senior bond trader suggested that yields could potentially reach as high as 6.45%. ANZ Bank expects that challenging external environment, high US tariffs, and weakening domestic activity indicators will test the RBI's confidence.
Impact on Overnight Index Swap (OIS) Rates: Uncertainty surrounding the interest rate outlook has led to increased paying interest in India's overnight index swap rates. The one-year OIS rate ended nearly 7 basis points higher at 5.51%, the two-year OIS rate rose 8 bps to 5.47%, and the liquid five-year OIS rate increased by 6 basis points to 5.70%.
Overall, the combination of the RBI's policy stance, inflation concerns, global economic factors, and expert opinions suggests that Indian government bond yields are likely to continue their upward trajectory in the near term. Market participants will closely monitor incoming data and global developments to assess the possibility of future rate cuts and their impact on the bond market.
