Indian government bond yields are predicted to remain steady but could potentially breach the 6.50% mark, influenced by a prevailing negative sentiment in the market. This outlook follows a sharp selloff driven by increasing fiscal pressures and concerns about higher debt supply.
On Wednesday, August 13, 2025, the benchmark 10-year bond yield is expected to fluctuate between 6.45% and 6.52%. On Tuesday, it closed at 6.4920%, which is the highest it has been since April 3. Traders anticipate the yield will test the critical technical level of 6.50% during the day, and a breach of this level could lead to further upward movement.
Several factors contribute to this cautious outlook. India's net direct tax collections have dropped 4% year-on-year, totaling 6.64 trillion rupees ($75.82 billion) between April 1 and August 11. This decline has fueled concerns that the government may need to increase borrowing to fund fiscal stimulus measures, especially as U.S. tariffs pose a threat to economic growth. The situation is further complicated by a perceived supply-demand mismatch in the market and the possibility of fiscal slippage, leading to reduced demand for bonds.
Market participants are closely watching the Reserve Bank of India (RBI) to gauge its comfort level with the current yield levels. The RBI's monetary policy calendar for 2025-26 has been a key factor of yield volatility. After a 50 basis points repo rate cut in June 2025, bringing the rate to 5.50%, the central bank chose to pause in August, maintaining the rate due to concerns about U.S. tariffs on Indian goods and overall global trade tensions. This neutral stance, along with a revised inflation forecast of 3.1%, has created uncertainty among investors. The upcoming policy meeting in September 2025 will be crucial in determining whether further easing measures will be implemented, which could potentially lower yields.
The demand for Treasury bills will also be tested as New Delhi plans to raise 210 billion rupees through the sale of 91-day, 182-day, and 364-day T-bills.
In related market activity, India's overnight index swap (OIS) rates are expected to show minimal change at the open, with a potential receiving bias as some traders factor in a rate cut due to increasing concerns about economic growth amid tariff implications. On Tuesday, the one-year OIS rate closed at 5.51%, while the two-year OIS rate stood at 5.455%. The liquid five-year OIS rate settled at 5.6725%.
Globally, Brent crude futures are trading at $66.05 per barrel, showing little change from the previous day. The ten-year U.S. Treasury yield is at 4.2907%, and the two-year yield is at 3.7371%.
Overall, the Indian bond market is currently navigating a complex environment influenced by domestic fiscal concerns, global trade uncertainties, and RBI policy decisions. Investors are advised to balance yield capture with risk mitigation, closely monitoring macroeconomic signals and policy announcements to navigate this range-bound market effectively.
