According to Aditya Birla Sun Life AMC Ltd. the Reserve Bank of India is expected to buy as much as 5 trillion rupees ($55 billion) worth of bonds between now and the end of March 2027. Nomura Holdings Inc. estimates purchases at around Rs 2.5 trillion in the year beginning April 1, while PGIM India Asset Management Ltd. purchases of as much as 2 trillion rupees are expected in the coming months.
The benchmark 10-year yield on Monday rose back to almost the same level as before the RBI started cutting rates early last year. The authority cut rates by 125 basis points in 2025 and injected unprecedented liquidity, yet only about 10% of those cuts have flowed through to bond yields. That compares with an average throughput of 83% in previous cycles, according to Emkay Global Financial Services Ltd.
“India has transmission issues,” said Kaustubh Gupta, chief investment officer for fixed income at Aditya Birla Sun Life AMC. Improving bond market transmission through liquidity injections and an increase in the money supply will “determine the theme for 2026,” he said, referring to their role in lowering bond yields.
According to Kotak Mahindra Bank Ltd, the RBI has injected a record Rs 14.5 trillion in liquidity since end-December 2024 through cuts in cash reserve ratios, open market bond purchases and currency swaps. Yet long-term bond yields have barely responded. The ten-year interest rate fell only 17 basis points last year, while the interest rate on longer maturities actually rose. The yield on one-year certificates of deposit rose by 19 basis points in December, the highest level since October 2023.
The cost of borrowing corporate bonds reflects the same gap. State-owned Small Industries Development Bank of India paid about 30 basis points more for the issuance of a bond due 2029 last week than it did two months earlier, when it sold a security with a similar maturity at a 6.74% coupon.
Reserve Bank of India Sanjay Malhotra recently acknowledged the problem in an interview, saying monetary policy has “limitations” and transmission at the longer end of the yield curve remains a challenge. This weak pass-through keeps borrowing costs high for both the government and companies, putting pressure on an economy already hit by the highest US rates in Asia.
The pressure on the rupee has blunted the impact of monetary easing. The RBI’s currency operations to support the rupee have drained liquidity from the banking system, which has depressed demand for bonds. According to Kotak estimates, the RBI has sold around $45 billion in the foreign exchange market since October.
Demand for bonds has also declined due to declining interest from key investors such as insurers and pension funds, as insurers face slower sales of insured products and pension funds increase their equity allocation due to regulatory changes.
The higher costs of bond funds are now causing companies to turn to bank loans, which are more closely aligned with policy rates. Power Finance Corp., a frequent issuer, has suspended bond sales three times since November as borrowing costs rose. The lender instead turned to bank loans, cutting financing costs by 50 to 70 basis points, Chairman and Chief Executive Officer Parminder Chopra said last week.
There may be some relief. A possible trade deal with the US in the coming months could allay concerns about growth prospects and reduce the need for large-scale bond purchases.
For now, investors say further action is likely. Given the current liquidity crunch and continued currency intervention by the RBI, incremental bond purchases are likely in the coming months, said Puneet Pal, head of fixed income at PGIM Asset in Mumbai. “The dynamics between supply and demand remain unfavorable. We expect the curve to remain steep.”
Published on January 20, 2026
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