It’s been a volatile year for the government securities (G-Sec) market. The benchmark yields, after rallying in the first half, fuelled by rate cuts, rose in the second half as the market sensed the end of the rate-cut easing cycle and worsening demand-supply dynamics. However, the Reserve Bank of India’s (RBI) policy turn in December, announcing an unusual liquidity infusion, gave the market a boost, with the 10-year 6.48% 2035 G-Sec rallying to end at 6.56% on Friday. The market took comfort that the RBI is adhering to its promise and maintaining comfortable liquidity conditions.
During 2025, the 10-year benchmark, after hovering around 6.80-6.87% at the beginning of the year, touched a low of 6.13% in June, then surged to 6.70% in December before rallying to 6.53%.
Great Disconnect: Rate Cuts vs. Rising Yields
Looking ahead in 2026, market participants see G-Secs receiving support from potential inclusion in the Bloomberg Aggregate Global Index, which could influence bond yields and investor strategies, improved demand-supply dynamics, and further liquidity measures from the RBI. They expect the 10-year benchmark bond to trade in a range of 6.40-6.70%, with a downside bias toward the lower end only if conditions prove favourable. In addition, the market will watch for gross issuance and fiscal pressures.
“There is a clear disconnect between the RBI actions and market reactions in the year. The weak demand-supply supply mismatch, higher SDL (state development loans) issuances and faded expectation of further rate cut weighed on the market despite a 125 bps rate cut, pushing up the yields,” said VRC Reddy, head of treasury, Karur Vysya Bank. Weak demand from long-end investors like insurance companies, pension funds, and provident funds also impacted the demand-supply mismatch, widening the 10-year to 30-year spread to 80 bps this year compared to the usual 30-40 bps.
Though yield fell to 6.25% after two 25 bps rate cuts in February and April, it hardened after the June policy, when the RBI announced a stance change to accommodative, despite a 50 bps cut. The yields rose 32 bps since the June policy.
However, the RBI’s announcement of liquidity measures worth Rs 3 lakh crore in the third week of December led to the strongest market rally since April. The yield on the 10-year benchmark bond rallied to end at 6.56% on Friday.
Going forward, market participants will watch for SDL issuances during January-March, the Union Budget, and the likely inclusion of government securities in the Bloomberg Global Aggregate Index. Market participants estimate that index inclusion will bring in inflows of $20-25 billion.
Liquidity and Index Inclusion
In 2025, FPI remained net buyers in the debt market. They bought government securities under the fully accessible route (FAR) worth Rs 54,603 crore. Post-December policy, foreign investors began withdrawing from G-Secs, anticipating no further rate cuts and rising global yields that made other markets more attractive. So far in December, they have sold bonds worth Rs 13,354 crore. “Future FPI inflows into G-Secs to depend on stable rupee, US-India trade deal, softer global yields, and Bloomberg index inclusion,” said market participants.
“The next year is expected to be mixed,” said Alok Singh, treasury head at CSB Bank. He adds, “early pressure on SDL absorption, potential downside surprises in inflation, and possibly 1-2 more RBI rate cuts will see yields move in a range from 6.10% to 6.50%, though any rally will face profit-booking.”
According to Sameer Narang, chief economist, ICICI Bank, fiscal deficits at the centre and state levels will dictate FY27 gross issuances, heavily influencing supply dynamics. “While potential Bloomberg index inclusion could boost demand sentimentally, fiscal outcomes will dominate—keeping 10-year yields rangebound at 6.40-6.60%. Upside seems capped, but favourable conditions could push toward the lower end.”
“The 10-year yields should remain at 6.50-6.55% in the near-term. It could only dip below 6.50% with further OMOs. I expect another Rs one lakh crore of OMOs during February-March,” said Guara Sengupta, chief economist, IDFC FIRST Bank. Market participants believe the RBI will need to inject additional liquidity if rupee pressures persist to offset the drain from FX interventions.
“Demand is expected to improve next year with pensions normalising after hitting equity limits, insurance picking up on rising post-GST premiums, and Bloomberg index inclusion could attract FPIs. Supply challenges persist, but conditions won’t deteriorate sharply, keeping yields rangebound,” Sengupta added. Reddy of Karur Vysya stated that the monetary conditions leave room for one more rate cut, bolstered by expectations of benign inflation in 2026-27. He expects yields to reach 6.70% in the near term but ease to 6.40% with favourable demand-supply dynamics.
