The Indian government bond yields surged on Friday as the Reserve Bank of India (RBI) did not announce any liquidity measures during the monetary policy meeting. Though the Governor, Sanjay Malhotra, gave assurance that the central bank will provide ample liquidity, but the market reacted negatively.
The yield on 10-year benchmark bond ended at 6.74%, up 9 basis points (bps) from the previous close. The market has seen some relief over the past few days, as the rupee’s pressure eased following the tariff cut announcement. As a result, the yields have fallen 12 bps in the last four days.
Auction Disappointment
“The market anticipated additional OMOs, but the RBI announced none during the policy meeting. Moreover, the government securities auction disappointed the market. The cut-off yields of 2065 paper were 2-3 bps higher than the market expectation. This has driven the market to more negative side, leading to further sell-off,” said a dealer at a large public sector bank.
The RBI has been continuously infusing liquidity since December through open market operations and forex swaps. It has conducted bond purchases worth Rs 4 lakh crore through open market operations and FX swaps of $ 23 billion. Liquidity measures, along with government spending, have help the system liquidity to improve. The liquidity surplus stood at Rs 2.17 lakh crore as on February 5, according to the RBI data.
Borrowing Burden
The market has been already under pressure due to worries about oversupply from the government’s higher gross borrowing at Rs 17.2 lakh crore for FY27.
“The gross number looks large only because next year’s redemptions are high. What matters is net borrowing, which rises only marginally—from Rs 11.53 lakh crore to Rs 11.73 lakh crore—making the increase modest relative to Budget and GDP growth. Strong T-bill mobilisation, small savings inflows, and about Rs 2.5 lakh crore of planned switches will support liquidity and yield curve management,” RBI Governor Sanjay Malhotra said in the post-policy press conference.
“Going ahead, an extended policy pause is likely to result in range-bound bond markets, with demand–supply dynamics and domestic liquidity conditions acting as the key drivers. The benchmark 10-year yield is expected to trade in a broad range of 6.60%–6.80% in the near term, supported by the RBI’s calibrated and predictable policy approach,” said V R C Reddy, head of treasury, Karur Vysya Bank.