The RBI's Monetary Policy Committee began deliberations on Wednesday for its bi-monthly interest rate decision, with the announcement scheduled for Friday morning by Governor Sanjay Malhotra. According to ETLegalWorld, experts are widely anticipating a status quo on the 5.25% repo rate, with the central bank having already reduced rates by 125 basis points since February 2025. As per BofA Global Research, the rate-cutting cycle appears to be over for now, with the central bank expected to continue managing liquidity provisions carefully to ensure rate transmission remains active. Deepak Agrawal, CIO - Debt at Kotak Mahindra AMC, noted that conditions favour policy stability with inflation well below target, growth momentum intact, surplus system liquidity, and fiscal consolidation reaffirmed. The MPC's last move was a 25-basis-point cut in December, its fourth since February 2025, bringing the total easing to 125 basis points.
Indian government bonds moved marginally higher on Thursday morning as traders held bullish positions ahead of the central bank's debt purchase and policy decision. According to The Economic Times, the benchmark 6.48% 2035 bond yield was at 6.6573% as of 9:30 a.m. IST, after ending 6.6472% on Thursday, with the yield having plunged 12 basis points in the last three sessions. Bond prices move inversely to yields, indicating that bond prices have increased slightly in the current session and bonds rose for a second consecutive session. However, the bond market reacted sharply on Monday as the benchmark 10-year government bond yield climbed to its highest level in more than a year, rising by as much as 8 basis points to 6.78%, its highest since January 17, 2025, and marking the steepest intraday rise since August 29, 2025. Over the past month, the yield has increased by 17 basis points.
The Reserve Bank of India will buy bonds worth ₹500 billion ($5.53 billion) on Thursday, including liquid former benchmark 6.33% 2035 paper. This represents the last scheduled open market operation from the RBI this fiscal year, taking its aggregate bond purchases to a record ₹6.8 trillion rupees. The market will watch the cutoff of this paper for any yield signal from the RBI. The central bank advanced its planned ₹50,000 crore OMO bond purchases to January 29 and February 5, a tactical adjustment, not a new policy shift. However, the market's reaction was telling: despite the RBI's intervention, yields continued to climb, indicating that the sheer volume of new government debt was overwhelming the central bank's ability to manage the supply-demand imbalance. Analysts noted that the amount of liquidity injected was lower than expected, which pushed yields higher and underscored the market's cautious stance ahead of the full budget details.
Indian government bond investors would aim to break the 10-year benchmark bond yield level of 6.70% on Thursday, ahead of the central bank's debt purchase later in the day and in anticipation of liquidity-boosting measures in Friday's monetary policy decision. According to The Economic Times, the benchmark 6.48% 2035 bond yield is likely to trade in 6.67%-6.72% band during the session, with the yield ending at 6.6472% on Thursday, easing 12 basis points in three sessions. "If there is no action from the central bank, we do not rule out a retest of 6.75%," a trader with a private bank said. The tone of the policy will have a 'wait-and-watch' approach, and no hints of further rate cut could mean a hawkish policy, pushing yields higher. However, to support liquidity and the bond market, RBI may continue with liquidity operations such as OMO purchase. Madhavi Arora, economist at Emkay Global, expects liquidity to rise to around 2.4 trillion rupees by end of March, which may limit the need for more RBI infusion via debt purchases.
The bond market reacted sharply on Monday as the Finance Minister announced a record gross borrowing plan for 2026–27, with the 10-year yield rising by as much as 8 basis points to 6.78%, its highest since January 17, 2025. The government announced a larger-than-expected gross market borrowing of ₹17.2 lakh crore through dated securities for FY27, representing a 17% increase over the previous year. As reported by The Economic Times, the higher gross borrowing target of ₹17.2 lakh crore is the key variable to watch and could keep government bond yields under mild pressure in the near term until supply dynamics become clearer. "The higher gross borrowing target of ₹17.2 lakh crore is the key variable to watch and could keep government bond yields under mild pressure in the near term until supply dynamics become clearer," said Saurav Ghosh, co-founder of Jiraaf, a bond market platform. The central and state governments are likely to borrow a gross amount of over ₹30 trillion in the next financial year starting April, an increase of over 10%, adding to supply woes. The budget's borrowing plan has already pushed the 10-year benchmark yield to 6.78%, its highest level since January 2025, with analysts seeing a clear threshold: a sustained move above 7% would signal a loss of control and likely trigger a reassessment of the RBI's stance.
Indian mutual funds are continuing to sell government bonds despite recent US trade deal relief, with funds net selling bonds worth ₹290 billion ($3.2 billion) in January - the most for any month on record. As reported by Reuters, mutual funds are the seventh-largest holders of Indian government bonds and sold more than 10% of their overall holdings of ₹2.81 trillion last month. Fund managers are moving away from government bonds and instead investing in shorter duration corporate bonds, debt issued by banks and higher-yielding state debt. "While the tariff announcement has brought forward positive market sentiment, demand-supply challenges continue to persist as there was no buyback announcement in the budget, with gross borrowings remaining elevated," said Basant Bafna, head - fixed income at Mirae Asset. Funds prefer two- to four-year corporate bonds as the focus shifts from mark-to-market capital gains to accrual-based strategies. Rising yields typically mean investors expect higher interest rates ahead and therefore sell bonds they already hold, with debt investors likely to feel the impact as bond prices fall and net asset values of debt mutual funds decline.
The RBI's Monetary Policy Committee is scheduled to meet February 4-6, with consensus among experts pointing to a hold on the 5.25% policy repo rate. Crisil and PwC analysts both predict the central bank will maintain its current stance, citing a rare "goldilocks" environment of strong growth and low inflation. The MPC's last move was a 25-basis-point cut in December, its fourth since February 2025, bringing the total easing to 125 basis points. However, the central bank faces a classic crossroads: maintain the status quo on rates but deploy new instruments to steer the yield curve, or allow the market to price in a higher risk premium. The case for status quo is strong: the central bank has raised its GDP forecast for the current fiscal to 7.3%, and inflation remains subdued at 1.33% in December. Yet the central bank's mandate is not just about growth; it is to ensure inflation stays within its 2-4% target range. Crisil projects inflation to rise to 5.0% in the next fiscal year, driven by statistical factors, creating tension between the MPC's inflation target and the fiscal reality of a record borrowing plan. Lokanath Panda, COO at BLS E-Services, noted that the government's decision to raise public capital expenditure is expected to create a strong multiplier effect across infrastructure and allied sectors, including real estate.
The fiscal shock is not just a one-off event; it is a symptom of deeper, structural imbalances in India's financial system. The record gross market borrowing of ₹17.2 lakh crore for FY27 creates a significant supply shock, yet the demand side is constrained. Pension and insurance funds, traditional buyers of long-duration government securities, face regulatory and capital requirements that limit their capacity to absorb this new supply. This creates a persistent supply-demand mismatch, a dynamic that has kept borrowing costs sticky even after the RBI's aggressive rate cuts. The overarching risk is a self-reinforcing cycle: higher yields increase the government's borrowing costs, which could widen the fiscal deficit. This, in turn, may force the RBI to commit even more of its balance sheet to buy bonds, eroding its credibility and potentially fueling inflation expectations. Compounding this pressure is the external sector: the rupee has been under severe strain, falling to a record low of 91.9875 per dollar. This slide pressures the currency and critically limits the RBI's capacity to intervene, as the central bank's foreign exchange operations are already linked to its bond purchases for sterilization. With capital flows subdued, the RBI must use its own reserves to support the rupee, which in turn reduces the liquidity it can deploy to buy government bonds, creating a vicious circle.