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Informist, Tuesday, Jan. 27, 2026

 

NEW DELHI – The yield on the 10-year benchmark government bond hit its highest level so far in 2025-26 (Apr-Mar), despite the Reserve Bank of India's announcement to infuse durable liquidity through measures including open market operations to buy bonds. The yield on the 10-year benchmark 6.48%, 2035 gilt hit a high of 6.7194%, its highest level since Mar. 5.

 

Traders said the key yield level was broken due to lack of aggressive purchases from any section of the market, including state-owned banks, on caution before the Union Budget for FY27 on Sunday. Dealers also cited the lack of positives before the government's borrowing programme is announced and persistent short sales by traders to make room for the fresh supply worth INR 320 billion of the 2035 gilt at the auction Friday.

 

"It's difficult to say when the yield will reverse," a dealer at a foreign bank said. "Now that 6.70% is broken, we could see 6.75% by the Budget before we get some buying support. None of the liquidity will hit the market before the Budget."

 

On Friday, after market hours, the RBI announced it would buy INR 1 trillion of gilts through two OMOs of INR 500 billion each on Feb. 5 and Feb. 12, in line with market expectations. The central bank will also conduct a 90-day variable rate repo auction for INR 250 billion on Friday and a $10-billion, three-year dollar-rupee buy-sell swap auction next week.

 

Traders had expected the key 6.70% mark to hold after the RBI's liquidity support announcement but traders trimmed their portfolios after realising the durable cash infusion--through OMOs and the buy-sell swap--would only take place after the Budget. Moreover, state-owned banks said they did not have the appetite to buy gilts aggressively especially with the fresh supply of the 6.48%, 2035 bond coming on Friday and INR 398-billion of state bond supply Tuesday.

 

There was also no speculation that the RBI was buying bonds in the secondary market, which it had on Dec. 23 when the 10-year yield had risen to within touching distance of 6.70% for the first time in the financial year. This was seen as a tacit understanding the central bank was not keen to "defend" or cap the yield level any longer, dealers said. A rise to 6.6950% on Jan. 19 had drawn investor interest and also led to further speculation of RBI purchases on-screen.

 

Despite the central bank's liquidity infusion, very little has actually translated to a banking system liquidity surplus – which continues to remain well below 1% of banks' net demand and time liabilities on a daily basis – due to lack of government spending, dealers said. The growth in the government's cash pile is being closely monitored as Finance Minister Nirmala Sitharaman unveils revised estimates for FY26 and the budget targets for FY27 on Sunday.

 

In addition to poor government spending, gilts have been hit by other negatives in January including Bloomberg Index Services' decision to keep India's fully accessible route bonds on review for inclusion on its Global Aggregate Index. Traders had widely expected India's gilts would be announced for addition to the flagship debt index this month and bonds will likely miss out of $10 billion-$20 billion of foreign inflows in 2026 because of the delay, dealers said. State-owned banks are also not keen to replace bonds sold to the RBI at OMO auctions on the view that yields will rise further after the Budget's borrowing announcement.

 

The Centre's gross borrowing target for FY27 is expected to be between INR 16 trillion and INR 17 trillion, compared with INR 14.72 trillion for FY26. A number higher than expected may weigh on bond prices, while an increase in funding through Treasury bills or small savings and a gross borrowing number below INR 16 trillion would boost bond prices, dealers said. 

 

"The ability of PSUs (state-owned banks) to manage yields has become limited, most of the activity now takes place in the trading books," a dealer at a state-owned bank said. "Plus, we are also seeing the same indicators that everyone in the market is seeing: it is better to be light and then buy 10-year (the 6.48%, 2035 bond) at auction if you want to position more aggressively."

 

Traders expect the 10-year gilt yield to rise slightly ahead of the auction and the Budget before taking cues from the borrowing announcement.  End

 

Reported by Aaryan Khanna

Edited by Ashish Shirke

 

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