For the second consecutive session, the benchmark 10-year G-Sec yields hardened on sustained selling by foreign institutional investors (FIIs). On Tuesday, the yield on the 10-year 6.48% 2035 bond rose 5 basis points (bps) to 6.62%, up 10 bps from 6.49% on Friday’s post-MPC close.
“Globally, yields have steepened, while with recent policy rate cuts and liquidity measures in India, the market seems to believe we are close to the final phase of rate cuts,” said a treasury official at a foreign bank.
According to him, this has led to reduced market positions, especially during year-end adjustments and as overseas investors unwind positions ahead of holidays, leading to higher yields. Over the past two sessions, FPI selling in G-Sec via FAR has been close to Rs 3,291 crore. For FY26, FPIs, as on December 9, have been net buyers to the tune of Rs 9,003 crore.
Growing investor concerns
The recent move reflects growing investor concerns that the Reserve Bank of India (RBI) is unlikely to deliver further rate cuts amid supply-side pressures and global yield movements that weigh on sentiment.
“The upward pressure on bond market yields is largely due to adverse supply-demand dynamics, with markets facing the prospect of a surge in state government borrowings in Q4FY26, said Gaura Sengupta, chief economist at IDFC First Bank.
On the demand front, she believes there has been weakness in investor appetite (insurance and pensions) and in banks’ investment appetite. “Pensions are investing more in equities due to an increase in investor limits, while insurance investment appetite has been curtailed due to a slowdown in premiums in H1FY26,” she adds.
OMOs to absorb excess supply
Banks’ appetite to invest in G-Secs has also been limited as the rate-cut cycle is almost over, say bankers, who also attribute the pick-up in credit offtake, reflected in the credit-to-demand ratio rising to 80%, near its historical high.
At the same time, the RBI’s open market operations (OMOs) are expected to provide some relief by absorbing excess supply, but traders caution that such interventions will only soften rates marginally rather than trigger another rally.
“The OMO purchases will help stabilise the market, but the days of a sustained rally are behind us,” said a senior dealer at a public sector bank. “With global yields firming and domestic supply pressures mounting, investors should brace for higher rates over the next year.”
The overnight indexed swap (OIS) curve has also signalled a shift in expectations. In the last two sessions, the five-year OIS rate moved 16 basis points higher to 5.95% from 5.79% on Friday, suggesting that market participants anticipate a long pause and an eventual hike, says Rajeev Pawar, Head of Treasury, Ujjivan Small Finance Bank.
Madan Sabnavis, chief economist at Bank of Baroda, in a note on Tuesday, said that over the past 15 years, the relationship between the repo rate and the 10‑year bond yield has shown distinct patterns in spreads. Periods of low repo rates have typically been associated with wider spreads, as seen after the Lehman crisis and during COVID, when the repo was cut to 4% and spreads peaked at 220 bps.
Conversely, higher repo regimes have compressed spreads, with lows of 42 bps between 2011–2015 and 86 bps post‑COVID rate hikes. According to Sabnavis, the current trends suggest that with repo at 5.25%, yields could settle in the 6.40–6.50% range, consistent with the pattern of higher spreads at lower repo levels.
“Hardening of government bond yields a technical rather than fundamental reason, of more long-end new issuance supply and fear from weakening INR,” said Vishal Goenka, Co-Founder of IndiaBonds, who believes RBI will solve the long-end supply imbalance and flatten the curve for better transmission of lower interest rates through the banking system. “I would anticipate another 25bps rate cut in India by the financial year end, and likely we will see US rates being cut in the same timeframe,” he added.