The Reserve Bank of India announced the results of its Additional Competitive Underwriting (ACU) auction conducted on May 22, 2026, with primary dealers underwriting ₹21,000 crore across three government securities. According to The Hindu BusinessLine, the auction covered 6.03% Government Security 2029 (₹11,000 crore), 6.68% Government Security 2033 (₹11,000 crore), and 7.24% Government Security 2055 (₹10,000 crore). The 6.03% GS 2029 achieved total underwriting of ₹11,000 crore with a cut-off commission rate of ₹1.78 per ₹100, while the 6.68% GS 2033 and 7.24% GS 2055 both achieved ₹10,000 crore underwriting with identical commission rates of 0.88 paise per ₹100. The actual auction for these securities is scheduled for May 22, 2026, subsequent to the completion of the underwriting process.
Indian government bonds rallied in early trade on Friday as expectations of a record central bank surplus transfer overshadowed rate-hike concerns, with the benchmark 6.48% 2035 bond yield settling at 7.0917%, bouncing off the day's low of 7.0636%, but still 2.2 basis points below Thursday's close. According to The Economic Times, the Reserve Bank of India approved the transfer of ₹2.87 trillion rupees ($29.99 billion) as surplus to the federal government, which is bigger than last year's record 2.69 trillion rupees, but below market expectations. A hefty dividend would help government finances at a time when they are likely to come under pressure from the Iran war-led energy shock, traders noted. The rally came after yields had surged a day earlier after Bloomberg News reported that the RBI is considering all available options to stabilize the rupee, including raising interest rates, which had raised bets of policy tightening.
The benchmark 6.48% 2035 bond yield rose 3 basis points on the week after sharp swings in recent sessions, as reported by The Economic Times. An advance in Indian government bonds was restrained on Friday by traders paring bullish positions after a lower-than-expected surplus transfer from the Reserve Bank of India to the government brought fiscal concerns to the fore. "There is risk of a large fiscal slippage, so the government is in need of additional revenue sources," said A Prasanna, chief economist at ICICI Securities Primary Dealership. The median forecast from a Reuters poll of economists pegged India's fiscal deficit at 4.7% of gross domestic product this fiscal year, with some saying it could go as high as 5%, compared to last year's 4.4% and the government's 4.3% target. MUFG has called for RBI policy rate hikes of 25 bps each in June and August, following a similar projection by Standard Chartered.
The Indian bond market is experiencing a one-way move with the benchmark 10-year government bond yield rising by almost 90 basis points since May 2025, according to Business Standard. This represents a 45 basis points increase from 6.66% before the West Asia crisis at end-February 2026, with the yield curve level moving up by 28 basis points on average in May 2026 from February levels. The global bond market is reflecting this anxiety, with 10-year sovereign yields rising by more than 50 basis points across several advanced and emerging markets, including Japan, UK, US, Canada, Italy, Spain, South Korea, Thailand, and others since the start of the West Asia crisis. As per Business Standard, India's 43 basis points rise in bond yields is part of a broader global repricing of geopolitical and inflation risk, with the fed funds futures market now completely pricing out the 50 bps Fed rate cut expectation. The likelihood of CPI inflation climbing to the 5-6 per cent range in FY27 from 2.1 per cent in FY26, and a slippage in fiscal targets, could potentially push the 10-year g-sec yield to the 7.25-7.50 per cent range, the highest since the Russia-Ukraine war.
The RBI does not see interest rate hikes as the best way to defend the embattled rupee, reinforcing that inflation - not the currency - will guide policy on borrowing costs, according to Reuters. This stance comes as markets are now pricing rate hikes in the future as oil is essential for all economies and rising input prices mean higher inflation will follow. The key transmission channel is through foreign investments in India, where when US yields rise, returns there become more attractive, prompting global investors to move money out of India, which can have adverse impacts on economic balance, currency, and all financial assets. At the start of this year, markets were expecting rate cuts from major central banks, including the US Federal Reserve. That picture has changed considerably, with markets now pricing in at least one rate hike over the next year, and US Treasury yields have already risen 60 to 65 basis points in just two months.
On Friday, India's 10-year bond yield has risen about 40 basis points since the start of the Iran war, with a knock-on impact on corporate debt yields, which have risen to multi-year highs, prompting firms to turn to floating-rate bonds, as per The Hindu BusinessLine. New Delhi is selling ₹32,000 crores of bonds later in the day, which would test investor appetite. India's overnight index swap rates eased as traders received fixed rates after heavy paying in the previous session on rate-hike concerns. The one-year swap ended 5.5 bps lower at 6.30%, while the two-year rate fell 3.5 bps to 6.52%, and the five-year rate fell 2.75 bps to 6.8150%. BMI, a Fitch company, said it is maintaining its forecast for the federal government's fiscal deficit at 4.5% of GDP, above the government's 4.3% target, while flagging increased upside risks.
