India's 10-Year Bond Yields Hit Three-Year Low: RBI Liquidity Boost and Market Outlook

The Indian government’s 10-year benchmark bond yield has declined for a fifth consecutive week, reaching its lowest level in over three years as the Reserve Bank of India (RBI) continues to inject liquidity into the financial system. On April 17, 2025, the yield dipped to 6.3889%, underscoring a significant shift in market sentiment driven by easing inflation, accommodative monetary policy, and proactive RBI measures. This article dissects the drivers behind the bond rally, evaluates the macroeconomic backdrop, and weighs risks to the outlook.

The Bond Rally: Liquidity and Policy Support

The recent decline in yields reflects the RBI’s aggressive liquidity management. In April 2025, the central bank cut the repo rate by 25 basis points to 6.0%, the first reduction since late 2023. Simultaneously, it announced ₹80,000 crore in additional open market operations (OMO) bond purchases, adding to the ₹5 lakh crore of durable liquidity injected in the January-March quarter. These steps, combined with a prior Cash Reserve Ratio (CRR) cut in December 2024, have pushed banking system liquidity into a surplus of ₹1.5 lakh crore, with the RBI targeting a ₹2.2–2.5 lakh crore surplus to ease borrowing costs.

Analysts such as Puneet Pal of PGIM India Mutual Fund project the yield to consolidate between 6.35% and 6.55% in the near term, citing the RBI’s accommodative stance and expectations of further rate cuts. However, the bond market’s resilience also hinges on the government’s borrowing plans: ₹8 trillion in bond sales are scheduled between April and September 2025, which could test investor appetite.

Inflation Eases, Core Concerns Linger

A key catalyst for the yield decline has been the moderation in inflation. India’s headline Consumer Price Index (CPI) fell to 3.61% in March 2025, down 91 basis points from February, driven by declining food prices. Core inflation (non-food, non-fuel) edged up to 4.0%, marking the first time in five years that core inflation has exceeded headline inflation. While the RBI’s target of 4.0% CPI for FY2025–26 appears achievable, the persistence of core inflation—a lagging indicator—signals underlying price pressures that could constrain further easing.

Economic Outlook: Growth Moderation Amid External Risks

The RBI revised its FY2025–26 GDP growth projection to 6.5%, slightly downgraded from earlier estimates, citing global volatility. Growth is expected to be supported by a rebound in manufacturing and resilient services, but risks loom from India’s record Balance of Payments (BoP) deficit of ₹38 billion in Q3FY25, driven by capital outflows. A narrowing current account deficit (CAD) to 1.1% of GDP and a strong services trade surplus of $18.5 billion in February offer some solace, but external imbalances remain a vulnerability.

Global and Domestic Crosscurrents

While Indian yields have trended downward, global bond markets have diverged. U.S. 10-year Treasury yields rose to 4.25% in April 2025, reflecting Fed policy uncertainty, while European bond yields hardened amid Germany’s fiscal expansion. Domestic risks include the rupee’s fragility—projected to trade between 85.70–86.70 against the dollar—and potential disruptions from U.S. tariff policies.

Conclusion: A Bullish Near Term, But Monitor the Horizon

India’s 10-year bond yield at 6.3889% marks a critical inflection point, with the RBI’s liquidity support and easing inflation justifying the rally. The central bank’s commitment to maintaining a ₹2.2–2.5 lakh crore liquidity surplus and further rate cuts could push yields lower, potentially testing the 6.0% threshold by year-end. However, investors must remain vigilant:

• Supply Risks: The government’s ₹8 trillion bond issuance over six months could pressure yields if demand falters.
• External Shocks: The BoP deficit and global rate dynamics may limit the RBI’s room to maneuver.
• Core Inflation: The 4.0% core rate underscores latent price pressures, which could complicate the easing cycle.

For now, the bond market’s optimism is justified, but the path ahead will depend on how effectively the RBI navigates these crosscurrents. The stage is set for a tactical long position in Indian government bonds, but investors must stay agile to capitalize on opportunities while mitigating risks.