Indian government bond yields cooled noticeably on Thursday, reversing their recent upward trajectory as markets responded to a combination of positive domestic and global cues. A coordinated lift came from the US Federal Reserve’s 25 bps rate cut and a strong round of open market operations (OMOs) by the Reserve Bank of India (RBI). Together, these factors helped ease pressure on the yield curve and signaled a more accommodative interest rate environment ahead.
What Triggered the Move?
Two major catalysts shaped Thursday’s bond market action:
The US Fed cut its policy rate by 25 basis points, boosting global risk sentiment and pushing US Treasury yields lower.
The RBI conducted an aggressive bond purchase auction, absorbing a significant chunk of government securities and easing domestic yield pressures.
This policy combination created a synchronized softening of yields across global and Indian markets.
Benchmark Performance
10-Year Indian Benchmark (IN063335G):
Closed at 6.6122%, down from the FY26 high of 6.6649% recorded just a day earlier.US 10-Year Yield:
Declined to around 4.14%, reflecting expectations of a more dovish path ahead from the Fed.
RBI’s Aggressive OMO Strategy
The RBI played a central role in shaping market sentiment:
Bought bonds worth ₹500 billion (₹50,000 crore) in Thursday’s auction.
Accepted bids at higher-than-expected prices, effectively pushing yields down.
Scheduled another ₹500 billion purchase next Thursday, maintaining a strong presence in the market.
YTD Purchases: A record ₹3.16 trillion in debt purchased in FY26 so far.
This heavy buying comes against the backdrop of a banking system liquidity surplus of ₹1.67 trillion, though tax-related outflows could tighten liquidity in the coming days.
Strategic Significance of the RBI’s Move
1. Yield Curve Management
By accepting aggressive prices, the RBI is clearly signaling its intent to cap upward movement in yields. Market expectations now peg total OMO purchases at ₹2 trillion for the rest of FY26, indicating a sustained effort to maintain orderly market conditions.
2. Global Spillover from the Fed
The Fed’s rate cut not only boosted risk appetite but also pulled global bond yields lower. Indian OIS rates mirrored this trend, with the 5-year OIS falling nearly 4 bps to 5.92%, pointing to expectations of a softer rate environment ahead.
3. Absorbing Government Borrowing Supply
India’s robust OMO calendar is critical as it helps absorb the steady supply of government securities. This ensures the government’s borrowing program continues smoothly without causing a spike in borrowing costs across the broader economy.
Market Reaction
G-Secs: Bond prices surged as yields edged lower across the curve.
Currency: The rupee weakened modestly, with USDINR up 0.45% near 89.85. Despite a softer US dollar globally, importer demand put pressure on the currency.
Outlook
With coordinated easing from global and domestic policymakers, the bond market appears set for a period of greater stability. The RBI’s decisive intervention underscores its commitment to keeping borrowing costs in check, while the Fed’s dovish shift provides support from abroad. As long as OMO volumes stay elevated and global yields remain benign, Indian bond yields could see further moderation in the weeks ahead.
