Bonds, Yields, and the RBI: Decoding India’s Debt Market
India’s bond market is under scrutiny as the Reserve Bank of India (RBI) makes significant moves in response to economic indicators. In the past year, improvements in India’s economic outlook have led to the RBI cutting repo rates by 100 basis points in 2025 to stimulate growth, reports 24brussels.
The bond yields, however, have been fluctuating. Following the RBI’s Monetary Policy Committee (MPC) meeting in June 2025, the 10-year government security (G-Sec) yield increased from 6.30% to 6.65%. This shift, along with a change in policy stance from accommodative to neutral, has dampened both domestic and foreign investor sentiment.
Increased foreign investment has marked a significant development in the bond market. India’s inclusion in global bond indices like the JPMorgan GBI-EM Bond Index has attracted foreign portfolio investors (FPIs), although there have been some withdrawals as the U.S. dollar strengthened earlier this year. Yet, positive signals emerged in September 2025, when the widening spread between U.S. and Indian sovereign bonds, coupled with a credit rating upgrade from S&P, began to draw investors back to Indian debt.
Liquidity constraints have impacted economic growth. The RBI has responded by injecting over INR 9.5 trillion into the financial system to boost liquidity in 2025, utilizing various mechanisms such as open market operations. This strategy aims to stabilize short-term interest rates in line with the repo rates while avoiding excessive liquidity that could mirror conditions seen during the COVID-19 pandemic.
Additionally, corporate participation in the bond market has surged, driven by a decline in borrowing costs for non-banking financial companies (NBFCs). The borrowing costs for these entities have dropped significantly from 11%-14% to 9%-12%, facilitating easier access to capital markets.
Retail investment has also gained traction, spurred by initiatives from regulatory bodies such as the RBI’s Retail Direct platform, which has seen user registrations double over the past three years. The rise of online bond platforms is democratizing access to the bond market, enabling everyday investors to engage in government bonds and potentially earn steady returns.
Since the change in RBI Governor from Dr. Shaktikanta Das to Shri Sanjay Malhotra, there has been a noticeable shift in focus towards stimulating growth through liquidity infusion while managing interest rates. Despite initial setbacks following the June MPC rate cut, market reactions have improved recently, indicating potential for further monetary easing.
The implications for institutional investors could see bond yields decrease by 20-25 basis points this financial year, presenting opportunities to invest in government securities and state development loans. For individual investors, understanding the bond market’s dynamics is essential as it influences various financial aspects, including home and car loan interest rates, as well as returns on investments in mutual funds and pension plans.
This analysis underscores the interconnectedness of the bond market with the broader economic landscape in India, highlighting its crucial role in shaping financial realities for individuals and institutions alike.
