India Bond Yields Rise Amid Profit-Taking, Central Bank Interventions Keep Markets Anchored

The Indian government bond market has entered a delicate balancing act in early May 2025. After a prolonged decline in yields driven by aggressive Reserve Bank of India (RBI) bond purchases, profit-taking by investors has pushed the 10-year benchmark yield upward. Traders now closely monitor the RBI’s next moves, as its open market operations (OMOs) remain the linchpin for anchoring yields and managing liquidity.

The Profit-Taking Pressure

By late April 2025, the 10-year yield had dropped to 6.33%, its lowest level in three years, as the RBI injected ₹3.65 trillion through OMOs and targeted a liquidity surplus of 1% of net demand and time liabilities (NDTL). However, a reveals a countertrend: yields rose to 6.36% by month-end and edged closer to 6.40% in early May. This reversal reflects profit-taking by investors who had accumulated long positions during the yield’s steep decline.

Analysts note that while the RBI’s accommodative stance remains intact, market participants are taking profits ahead of the May 30 government bond auction. The ₹320 billion 10-year benchmark offering could test demand, with yields potentially stabilizing between 6.3%–6.4% if the auction is successful.

Central Bank Interventions: The Anchor of Stability

The RBI has been proactive in its defense of liquidity. In early May, it announced ₹1.25 trillion in bond purchases, structured in four tranches (₹50,000 crore on May 6, followed by three ₹25,000 crore tranches). These purchases aim to offset government borrowing and maintain the NDTL surplus target.

The central bank’s strategy is paying dividends:
- Liquidity conditions: The banking system’s surplus averaged ₹1.4 trillion in April, a stark contrast to a ₹1.24 trillion deficit in March.
- Inflation: Core inflation eased to 4.5% in April, within the RBI’s 2–6% target range, reducing pressures for tighter monetary policy.
- Global context: U.S. 10-year yields fell to 3.6%, and the rupee strengthened to 84.58 against the dollar, bolstering investor confidence.

Risks on the Horizon

Despite the RBI’s efforts, risks loom large:
1. Foreign portfolio outflows: April saw $1.6 billion in debt outflows due to global trade policy uncertainty. A resumption of inflows could amplify yield declines, but geopolitical tensions with Pakistan and oil price volatility (Brent crude at $61.05/barrel) threaten stability.
2. Fiscal borrowing: India’s ₹7.52 trillion borrowing plan for FY2026 could strain demand if the RBI’s OMOs falter.
3. Term spread dynamics: The yield curve has steepened, with the 3-month/30-year spread widening to 88 basis points. This reflects diverging expectations for short-term rates and long-term growth.

Market Outlook: Navigating Between Bulls and Bears

Bank of Baroda analysts project the 10-year yield will trade between 6.30%–6.35% in May, with downside risks if liquidity stays surplus. IDFC First Bank’s Gaura Sen Gupta is even more optimistic, forecasting a descent to 6.0%–6.25% by year-end if OMO targets are met. However, traders remain cautious:

• Near-term catalysts: The U.S. Federal Reserve’s May 7 meeting could influence global yields, while India’s May 30 bond auction will test investor appetite.
• Policy watch: The RBI’s shift to an “accommodative” stance in April, alongside repo rate cuts, signals its commitment to growth over rate hikes.

Conclusion: Anchored by Policy, Tested by Reality

India’s bond market remains a battleground between profit-taking and central bank support. The RBI’s aggressive OMOs have kept yields in check, but external risks and fiscal challenges introduce volatility.

Key data points:
- Yield range: 6.30%–6.40% in May, with potential to dip to 6.0%–6.25% by year-end if OMOs exceed ₹4 trillion.
- Liquidity target: 1% NDTL surplus requires sustained RBI intervention, with ₹1.25 trillion already earmarked for May.
- Global spillovers: A Fed hold or cut could ease U.S. Treasury yields, indirectly supporting Indian bonds.

Traders should balance short-term profit-taking against the RBI’s long-term playbook. While the path to 6.0% is plausible, geopolitical risks and fiscal execution will determine whether yields stay anchored—or drift higher.

In this environment, investors are advised to monitor the May 30 auction results and the RBI’s liquidity injections. For now, the bond market’s dance between bulls and bears continues, with the central bank firmly holding the baton.