Informist Poll
10-year gilt yld may end volatile Jan at 6.57% before Budget
This story was originally published at 17:39 IST on 2 January 2026
Register to read our real-time news.Informist, Friday, Jan. 2, 2026
By Aaryan Khanna and Cassandra Carvalho
MUMBAI – A flurry of triggers lined up in the new year for the government bond market may push the 10-year yield into a month of volatile trade and the benchmark gilt could swing in as wide a range as 6.45-6.70% in January. Traders are optimistic that the Reserve Bank of India's open market bond purchases will help absorb bond supply this month but risk appetite may be strained before the Budget that is expected to increase gross borrowing in the next fiscal and a policy review which is expected to hold rates steady.
The yield on the 6.48%, 2035 gilt is seen little changed, at 6.57% by the end of the month, but may seesaw amid a whirlwind of triggers, according to the median of estimates of 11 money managers, treasury heads, and economists. The bond ended at 6.61% Friday and 6.59% on Dec. 31, having fallen 17 basis points in 2025.
"There are too many events lined up for the month with SDL (state bond) calendar, bond index inclusion, trade deal in the run-up to the Budget, keeping the 10-year yield volatile in the 6.45-6.70% range," said Pratik Shroff, fund manager - debt, LIC Mutual Fund. "We feel the 4-7 year part of the gilt yield curve will do well because it offers a fantastic carry over the repo rate, but the rest of the market is a tough call."
An eagerly-awaited trigger expected before the weekend itself is the release of states' borrowing plan for the March quarter. States' borrowing is expected at around INR 4.50 trillion in Jan-Mar, a period marked by seasonally high state bond issuances. A borrowing figure near or above INR 5.00 trillion will send the 10-year benchmark yield to 6.70%, a level that dealers expect the central bank will not be comfortable with. On other hand, some traders expect increased communication between the RBI and states in recent months to limit the size of the calendar and the borrowing through long-term bonds.
As state bond spreads over gilt yields expand in the March quarter, banks' asset-liability managers are keen to add bonds maturing up to seven years, though internal limits on stockpiling quasi-sovereign securities may limit incremental purchases. Even gilts themselves are an attractive proposition for some treasuries. Foreign banks are expected to lap up bonds maturing in up to five years, which offer around 105 basis points over the policy repo rate of 5.25%. Similarly, the 10-year benchmark gilt's yield will also be capped by bank purchases as it nears a spread of 150 bps over the repo rate, respondents said.
Moreover, the central bank has infused durable liquidity of INR 1.50 trillion through open market operation auctions of gilts in December and has scheduled another three tranches of INR 500 billion each in January. The central bank has recently been actively corresponding with market participants for feedback on trade activity and on preference for bonds at OMO auctions, respondents said, and auctions with favourable bonds would pull down bond yields more effectively. Another wildcard is that traders see the scope for OMO auctions between Jan. 22 and March but are unsure the central bank would announce them this month.
Most sales to the central bank at these OMO auctions are from held-to-maturity books, though replacement demand for gilts is seen limited as banks prefer illiquid and high-yielding state bonds. Outside OMO auctions, banks have a 5% limit on selling gilts from their held-to-maturity portfolios during the financial year and may begin using it if the 10-year gilt yield falls to 6.50% or below. Even if further OMO auctions fail to impress market participants by moving down benchmark yields immediately, risk appetite will still improve, leading to demand for illiquid securities such as state bonds, dealers say.
"Very clearly, I think the OMO was desperately needed if RBI wanted banks to purchase SDLs (state bonds). So obviously, the space and liquidity that has gotten generated, and will get generated through the OMOs will help banks have a cushion for purchase of SDLs," the head of treasury at a private-sector bank said. "My sense is, that it (cash from OMO sales) will not go into credit. We will use money (from OMOs) to replenish our portfolios."
A potential positive for bonds that traders expect is that India's fully accessible route bonds will be announced for inclusion in Bloomberg's flagship Global Aggregate Index. The index inclusion is likely to lead to inflows of $25 billion to $30 billion through the calendar year. If an official announcement confirms the speculation, the surety of foreign inflows may deter the RBI from conducting further OMO auctions, participants say.
The ultra-short and ultra-long-end of the bond yield curve is seen performing well, as the RBI absorbs short-term bond supply from banks' HTM books at OMOs, and strong quantum of purchases are expected from pension funds and insurance companies due to robust inflows in the Jan-Mar quarter, respondents said. Long-term investors still find levels attractive for bond forward rate agreements, despite a 16-bps rise in the five-year swap rate last month. An expected heavy supply of state bonds and gilts maturing in seven to 20 years is likely to limit a fall in yields in these tenures, depending on the auction pattern.
Closer to February, uncertainty before the Union Budget for 2026-27 (Apr-Mar) may temper the volatility in yields. With heavy gilt redemptions in the coming fiscal, the government is seen setting a gross borrowing target of anywhere between INR 15 trillion to INR 17 trillion, compared with a revised target of INR 14.72 trillion in FY26.
"That's one of the reasons why the rally will be limited because people will be worried about the supply...(the numbers are rough) but the gross issuance can be around (INR) 15.5 (trillion in FY27). Because redemptions for G-Sec also goes up, SDL supply can also be higher," said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. "Our estimate is tracking around 13 trillion (of state bond supply) in FY27. So, supply is an issue next (financial) year because of the redemptions, both from Centre and state."
The following are estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of January and March:
| ORGANISATION | Jan-end | Mar-end |
| HDFC Bank | 6.50-6.60% | -- |
| ICICI Bank | 6.60% | -- |
| IDFC FIRST Bank | 6.55-6.58% | 6.50-6.55% |
| LIC Mutual Fund | 6.45-6.70% | -- |
| Life insurance company | 6.50-6.55% | 6.45-6.50% |
| PNB Gilts | 6.62% | -- |
| Private sector bank | 6.53-6.66% | -- |
| Shinhan Bank India | 6.52-6.55% | 6.50-6.60% |
| South Indian Bank | 6.50% | -- |
| Standard Chartered Bank | -- | 6.60% |
| STCI Primary Dealer | 6.50-6.60% | -- |
| Tamilnad Mercantile Bank | 6.70-6.75% | 6.70-6.75% |
| Median | 6.57% | 6.55% |
End
US$1 = INR 90.1975
Edited by Akul Nishant Akhoury
For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.
Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd. by NSE Data & Analytics Ltd., a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt. Ltd.
Informist Media Tel +91 (22) 6985-4000
Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2026. All rights reserved.
To read more please subscribe
Share this Story:
