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10-year gilt yield seen 6.78% by Feb-end; liquidity push awaited
This story was originally published at 22:23 IST on 2 February 2026
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By Cassandra Carvalho
MUMBAI – In sharp contrast to expectations at the start of 2026, bond traders have little to look forward to in February. The benchmark 10-year government bond yield is seen rising, and only measures from the central bank are likely to prevent a surge to the key 7% level. The Union Budget for 2026-27 (Apr-Mar) aggravated the agony of bond market participants as the Centre unveiled a higher-than-expected gross borrowing number. Any respite now hinges on the Reserve Bank of India, with liquidity expected to be a focus at the central bank's Monetary Policy Committee meeting this week. Talk of further policy easing has faded into the background, with scant hope of further cuts in the repo rate or a change in policy stance to "accommodative."
The yield on the 10-year benchmark 6.48%, 2035 gilt is seen at 6.78% by the end of the month, according to the median of estimates of 14 money managers, treasury heads, and economists. The bond ended at 6.77% Monday, the highest closing yield for a 10-year benchmark since Jan. 15, 2025.
On Monday, bond yields returned to levels seen before the MPC began its rate-cutting cycle in February 2025, and are likely to move higher, after the central government on Sunday estimated a record gross market borrowing of INR 17.2 trillion through dated securities in FY27. An Informist poll of 30 market participants had expected a gross borrowing of INR 16.3 trillion. The range of bond yield movement has been rising by 5-10 basis points each month, and the 10-year benchmark bond yield is seen rising to 7% in FY27, market participants said. With supply rising, the 10-year bond yield is likely to remain above 6.70% in February, and the central bank's support is only likely to cap further gains.
As for the MPC's rate decision Friday, market participants expect the rate-setting panel to maintain the status quo on rates, after cutting the repo rate by 25 bps to 5.25% in December. Several participants see the terminal repo rate at 5.25%, with the MPC likely to opt for a "prolonged pause". Given the disruption to global trade and geopolitical conflicts, the MPC is unlikely to change its stance to "accommodative" after reverting to "neutral" in June, participants said. While nothing of significance is expected on the interest rate front, the focus is on the central bank's communication at the post-policy announcement.
RBI Governor Sanjay Malhotra is expected to emphasise supporting the banking system with funding and providing assurance that the RBI will continue its operations to infuse liquidity. In December, Malhotra reiterated that the central bank would provide sufficient liquidity to the banking system to keep it in surplus and aid monetary policy transmission. In April, the governor had said the central bank aims to keep surplus liquidity at around 1% of banks' net demand and time liabilities. As of Jan. 15, that would amount to a liquidity surplus figure of INR 2.5 trillion. The average net liquidity absorbed from the banking system by the RBI – a proxy for the liquidity surplus – was around INR 660 billion in January.
Since December, the RBI has infused liquidity through a combination of open market operations, dollar-rupee buy-sell swaps, and variable rate repo auctions of varying tenures. However, long-term VRRs are seen as reducing the case for more OMO auctions. Bond yields are seen falling only if the RBI conducts more OMO auctions than market expectations, as then replacement demand to maintain the statutory liquidity ratio buffers would drive appetite. The RBI has conducted or announced gilt purchases worth around INR 7 trillion in FY26 so far. Bond market participants expect at least INR 1 trillion of OMO auctions to be announced at the MPC announcement Friday.
"...That is one of the things that needs to be done. To ensure that system liquidity is 1% (of banks' net demand and time liabilities) and it's 1% throughout the month, even on a tax payment date. I think that solves multiple issues. One is the elevated credit deposit ratio in the banking system, the pressure that you're seeing in money markets. It will also help contain the bond market (volatility), which is a channel for transmission, also for RBI," Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said. "The expectation is that we get a more firm guidance on liquidity, possible announcements on liquidity infusion. RBI OMO purchase is the main support for the bond market as the rate cut cycle is behind us."
In such a scenario, the yield curve is seen steepening, as traders prefer the shorter end of the yield curve on bets that the central bank will continue to pump liquidity into the banking system, while long-term bond yields climb due to higher supply in the upcoming financial year. The 15-year benchmark gilt yield Monday hit its highest since May 3, 2024, while the benchmark 40-year bond yield hit a day's high of 7.51%, a yield spread of 74 bps over the 10-year benchmark.
"I think now we prefer to be on the short end only; in one or two years, corporate bonds. It's difficult to say in G-sec, but definitely reducing the duration now," a fund manager at a mutual fund said. "So, probably some FRB (floating rate bond) positioning and short(-term) bond positioning. And by short-bond I mean buying 28 (2028), 29 (2029) papers or SDL (state bonds) which may be (at) slightly higher yield (than a gilt of similar maturity)."
The new calendar year started off on a sour note for bond traders after Bloomberg Index Services deferred the inclusion of Indian government bonds in its flagship Global Aggregate Index. Traders were hoping the inclusion would bring in foreign inflows of around $25 billion, helping offset weakening demand from domestic investors. In Jan-Mar, banks are seen as largely reducing investments to focus on credit growth. As the focus shifts to lending amid a lack of optimism in the bond market, close attention will be paid to economic data. CPI inflation for January and the new CPI series will be released by the statistics ministry on Feb. 12. The reallocation of weights to the new series is expected to lead to higher readings. The RBI has forecast CPI inflation at 2.9% in Jan-Mar, and 3.9% in Apr-Jun FY27, just shy of the MPC's target of 4%. Later in the month, the government will also release the new series of GDP, along with the second advance estimate for FY26. The FY26 GDP growth was estimated at 7.4% in the first advance estimate released in January.
"The CPI numbers will tell us what is happening to inflation and likely to happen; maybe just from a momentum perspective or in terms of numbers going into FY27," Sakshi Gupta, principal economist, HDFC Bank, said. "And then the GDP numbers that come out at the end of the month, because that perhaps can also alter some of the assumptions around tax on the fiscal side; on tax growth and fiscal deficit, some of these, which can help bring in some optimism if the numbers are higher."
The following are estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of February and March:
| ORGANISATION | Feb-end | Mar-end |
| HDFC Bank | 6.70-6.85% | 6.70-6.85% |
| ICICI Bank | 6.75% | 6.80% |
| ICICI Securities Primary Dealership | 6.80% | 6.90% |
| IDFC FIRST Bank | 6.75-6.80% | 6.75-6.80% |
| Industrial and Commercial Bank of China | 6.70-6.80% | -- |
| Karur Vysya Bank | 6.70-6.75% | -- |
| Kotak Mahindra Bank | 6.80-6.90% | -- |
| Shinhan Bank India | 6.60-6.82% | 6.60-6.82% |
| South Indian Bank | 6.85-6.90% | -- |
| State-owned bank | 6.75-6.80% | -- |
| STCI Primary Dealer | 6.70-6.80% | 6.70-6.85% |
| Sundaram Mutual Fund | 6.70-6.90% | -- |
| Tamilnad Mercantile Bank | 6.90% | 6.75% |
| UCO Bank | 6.68% | 6.62-6.65% |
| Median | 6.78% | 6.78% |
End
US$1 = INR 91.51
Edited by Ashish Shirke
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