Global index inclusion and fiscal signals to influence yields into 2026
With the RBI’s rate cut cycle now on pause, Indian bond markets are entering a more nuanced phase. The 10-year government bond yield has largely stabilised in the 6.57-6.59 percent range following the recent MPC outcome, signalling that traders have broadly priced in the current policy stance. As we head into 2026, the next leg of bond market direction is less about repo rate moves and more about liquidity management, fiscal dynamics, currency stability, and global flows.
Post-MPC: Yields consolidate, volatility cools
The immediate reaction to the latest MPC meeting was largely muted, reflecting consensus expectations that the RBI would maintain a cautious stance amid sticky inflation risks and global uncertainty. The benchmark 10-year yield has since traded in a narrow band, suggesting that duration risk is now more balanced.
This consolidation marks a shift from the aggressive rally seen earlier in 2025, driven by front-loaded rate cut expectations and optimism around India’s inclusion in global bond indices. With policy clarity now in place, bond traders are turning attention to second-order drivers that could influence yields in the coming quarters.
Liquidity becomes the primary lever
In the absence of fresh rate action, RBI liquidity operations are emerging as a key market stabiliser. Tools such as open market operations (OMOs), variable rate repos, and FX swaps have taken centre stage in managing system liquidity and anchoring short-term rates.
Recent FX interventions to smooth rupee volatility have also had an indirect liquidity impact. As dollar sales tighten domestic liquidity, the RBI’s calibrated use of swaps and OMOs will be critical in offsetting any unintended tightening. For bond traders, sustained liquidity support could cap upward pressure on yields, especially at the longer end of the curve.
Also read | What retail bond investors should watch in 2026 now that rate cuts are likely over
Rupee stability and global spillovers
Currency stability remains another crucial variable. While the rupee has been relatively resilient compared to other emerging market peers, global factors such as US trade policies, commodity price shocks, or renewed dollar strength could reintroduce volatility.
Any sharp rupee depreciation would complicate the inflation outlook and potentially limit the RBI’s room to maintain accommodative liquidity conditions. For bond markets, this reinforces the importance of monitoring FX trends alongside domestic macro data.
Fiscal dynamics and borrowing signals
On the domestic front, fiscal arithmetic will be closely watched. While the government has remained committed to fiscal consolidation, risks remain around higher-than-expected GDP-linked borrowing needs or off-budget liabilities.
The borrowing calendar for FY27, along with signals on gross and net market borrowing, will be a key determinant of supply pressures. A well-distributed borrowing programme with no negative surprises could help keep yields range-bound, while any slippage may test market patience.
Global index inclusion: The slow burn continues
India’s phased inclusion in global bond indices such as JPMorgan GBI-EM and Bloomberg EM indices has already delivered meaningful foreign inflows through 2025. While the bulk of passive flows may be behind us, the story is not over.
Stabilisation of index weights and incremental active investor participation could continue to support demand for Indian government bonds. For traders, this creates a structural bid that may cushion yields during periods of global risk-off sentiment.
Also read | Active vs passive multi-asset funds: What’s the difference and how should investors choose?
Where could yields settle?
Most market participants now expect the 10-year yield to trade in a broad 6.5-6.7 percent range into early 2026. Downside may be limited without fresh rate cuts, but upside risks also appear capped as long as liquidity remains supportive and fiscal discipline holds.
In this environment, bond trading strategies are likely to shift from directional duration calls to relative value, curve positioning, and carry-focused approaches.
Bottom line
As India’s bond market transitions beyond the rate cut narrative, success for traders will depend on reading liquidity signals, fiscal cues, and global crosscurrents more than headline policy rates. The coming quarters may be less dramatic, but far more complex, demanding a sharper focus on fundamentals rather than policy speculation.
