RBI Keeps Rates Unchanged: Where Are Indian Bond Yields Headed Next?

RBI Policy Disappoints Bond Markets; Yields Edge Higher as Liquidity Hopes Fade

India’s bond markets reacted with mild disappointment to the latest monetary policy announcement by the Reserve Bank of India, even though interest rates were kept unchanged. While the policy decision itself was in line with expectations, the absence of fresh liquidity measures led to a slight rise in government bond yields.

Indian government bonds weakened marginally on Monday, with the benchmark 6.48% 2035 bond yield rising to 6.7609%, compared with 6.7363% at the previous close. Market participants had been hoping for additional liquidity support, such as open market operations (OMOs) or bond-buying signals, which did not materialise in the policy.

In its final policy review of FY26, the RBI’s Monetary Policy Committee (MPC) voted unanimously to keep the policy repo rate unchanged at 5.25% and maintained a neutral stance, citing evolving global and domestic economic conditions.

The central bank has already taken significant steps to support the bond market this financial year, purchasing nearly ₹7 trillion worth of government securities. These interventions had helped cap yields earlier. However, with no new liquidity announcements, investors are now recalibrating expectations, leading to near-term pressure on bond prices.

According to Basant Bafna, Head – Fixed Income at Mirae Asset Investment Managers, bond yields rose modestly after the policy. “Markets had expected more clarity on liquidity measures or OMOs in the policy, and in the absence of that, bond yields moved up marginally by around 3–5 basis points,” he said. Bafna added that liquidity conditions have improved in recent weeks due to a mix of durable and short-term measures, pushing overnight rates below the repo and standing deposit facility levels.

Medium- to Long-Term Outlook Remains Constructive

Despite the short-term disappointment, fixed income experts remain optimistic about the medium- to long-term outlook for Indian bonds, supported by stable inflation and resilient economic growth.

Killol Pandya, Head of Fixed Income at JM Financial Asset Management, said investors should remain constructive on bonds over a longer horizon. “We expect the shorter end of the duration curve to outperform the longer end over the medium to long term,” he noted, adding that investors may gradually shift towards higher accrual opportunities in corporate bonds and sovereign securities.

Echoing a similar view, Suyash Patodia, Joint Managing Director at Choice International, said stable interest rates provide greater visibility to borrowers and investors. “Bond yields are likely to remain range-bound with a mild downward bias, provided inflation stays under control. Healthy domestic demand, rising capital expenditure, and continued infrastructure spending support the RBI’s wait-and-watch approach,” he said.

Bafna also pointed out that although spreads over effective policy rates remain elevated compared with March levels, base effects are expected to ease inflation over the coming year. This could create limited room for a 25-basis-point rate cut, though the RBI is likely to remain cautious. Importantly, current spreads between the repo rate and the 10-year benchmark remain attractive versus long-term averages, with incremental flows from provident and pension funds expected to support government bonds over time.

Overall, while the RBI’s latest policy stance led to short-term disappointment in bond markets, experts believe improving liquidity conditions and supportive structural factors could provide stability and opportunities for investors over a longer investment horizon.