Yields on 15-40 year government bonds have risen 40-50 basis points so far in the 2025-26 fiscal, even after the Reserve Bank of India cut rates by 100 basis points, reflecting patchy demand from insurers and pension funds and rising supply concerns. Traders said current interest rate levels were attractive for re-entering the market, especially as liquidity is back in surplus and short-term supply declines after New Delhi conducted a debt swap operation. Investors continued to point out that a sustained easing in rates may need support from the RBI through buybacks, open market operations or steps to shorten supply duration.
Indian government bonds rose on Monday, following a rise in US government bonds and comfortable domestic liquidity, although lingering supply concerns reined in the advance. The benchmark yield on 6.48% bonds for 2035 stood at 6.6642%, up from 6.6799% on Friday.
“RBI liquidity support is needed to keep interest rates at lower levels,” said Alok Singh, head of finance at CSB Bank. “If liquidity remains in excess, supply will not be an issue.”
The average daily system liquidity surplus in February so far stands at 2.62 trillion rupees, compared to 660 billion rupees in January. During the day, local bonds followed the US debt market, with 10-year US Treasury yields down about 15 basis points since last week. On Friday, inflation fell to a multi-month low near 4.05% after data after Indian market hours showed US retail inflation rose 0.2% in January, up from 0.3% in December.
PRICES
Indian overnight interest rate swap (OIS) yields fell, monitoring a decline in US government bond yields. The one-year OIS rate fell by 1.25 basis points to 5.49%, while the two-year rate fell by 2.25 basis points to 5.5950%. The five-year OIS rate fell by 4 basis points to 6.0250%.
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