India’s bond yields are currently (1st quarter CY 2026) driven mostly by fiscal rather than monetary policy. The upcoming budget is a major driver for Indian bond yields, but analysts do not see much variation in yields at this point in time.
Due to a combination of factors, both domestic and global, experts feel that Indian bond yields will be range-bound in the near term.
“INR (Indian Rupee) bond yields remained firm into the new year, against the backdrop of low inflation, accommodative (but cautious) policy and actively managed liquidity,” according to a recent report authored by Radhika Rao, Executive Director and Senior Economist at DBS Bank.
What’s moving the bond market?
After acting early in December policy meet, the RBI announced another tranche of open market operations (OMOs) and USDINR FX swap in mid-December, besides intermittent short-term money market operations. Despite this, the still-elevated bond yields reflect the underlying dominance of fiscal policy over monetary stance, driven by two reasons.
State borrowings have been bunched up in 1Q26 (4QFY26) with plans to borrow a quarterly record of ₹5 trillion, at the higher end of expectations, after the size was scaled back in the previous two quarters to prevent hardening in yields. On a broader note, this also reflects the growing size of SDL issuances, narrowing the gap with the centre.
Secondly, beyond active central bank buying, other institutional investors face constraints. Replacement demand from banks remains tepid, pension funds have shown only incremental interest as they tilt toward equities, and insurance companies are limited by regulatory constraints.
Add to this, the center has rationalized the share of the long-term paper in its issuance mix (still higher than past trends), and states are yet to follow suit.
The note highlights that INR bond yields have remained firm despite low inflation and active RBI liquidity measures. With the 10Y G-sec moving back above 6.6%, yields are expected to show an upside bias in the near term within the 6.6–6.7% range, with the Union Budget and the February RBI policy meeting as key catalysts.
Rising commodity prices, especially industrial metals such as copper and precious metals like gold and silver, pose upside risks to inflation expectations globally, according to experts.
“Globally, over the last few months, yields have been slowly and steadily inching higher,” says Harsimran Singh Sahni, Executive Vice President- Treasury Head, Anand Rathi Global Finance. If these pressures begin to transmit into core inflation, they could reinforce the global repricing of yields.
Elevated yields in developed markets, including the US, Japan and the UK, also create spill-over pressures for emerging market bonds, including India.
With Japan yields having moved from 1.6% to 2.20% and US Yields being stuck in the range from 4.10% to 4.20% and having only recently given us a breakout above 4.20%, Sahni expects treasury yields to inch a bit higher globally.
If the If the bond price falls, then the yield rises, and if the bond price rises, the yield falls.
“If fiscal deficit is lower and net borrowing comes low, this should lead to a rally (in bonds),” says Murthy Nagarajan, Head-Fixed Income, Tata Asset Management. As a background, the market is expecting the fiscal deficit to be around. ₹17 lakh crore and net market borrowing to be at ₹11.5 lakh crores, assuming fiscal consolidation of 4.2%.
“Trade deal with EU and US should be positive for the market,” says Nagarajan. No trade deal with the US and Dollar debasement trade continuing are negatives, as that would lead to a higher current account deficit and higher commodity prices, which will affect the inflation outlook.
Fiscal policy key driver for bond market
“On the domestic front, fiscal supply remains the dominant driver,” says Tushar Sharma, Co Founder Bondbay, about the factors that will affect Indian bond yields.
The government’s borrowing program continues to be front-loaded, and the market remains sensitive to any perception of fiscal slippage. Front loading is the technical parlance for the allocation of costs unevenly, with the greater proportion at the beginning of the process or enterprise.
Even with RBI liquidity support, sustained supply without a clear reduction in issuance pressure can keep yields elevated. Additionally, while inflation is currently well-behaved, any upside surprise, particularly from food or energy, could quickly reprice rate expectations.
Monetary policy, while accommodative in tone, is constrained. The RBI is managing liquidity actively but remains cautious about sending strong easing signals prematurely.
“This limits the downside for yields in the near term,” says Sharma. A downside in yields refers to the decrease in interest rates, or returns generated by fixed income securities, such as bonds, which may be caused by rising bond prices.
(Manik Kumar Malakar is a freelance author. He writes on personal finance, bonds and equity markets.)
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
