Indian Bond Yields: Navigating Profit-Taking and Policy Uncertainty

The Indian bond market has entered a pivotal phase, with the 10-year government bond yield rising to 6.95% in recent weeks amid profit-taking by investors. Traders now await the eagerly anticipated minutes from the Reserve Bank of India’s (RBI) April policy meeting, which could offer clarity on the central bank’s stance toward monetary easing and inflation management. As markets balance short-term volatility against long-term policy signals, the path forward for bond yields hinges on how the RBI navigates growth and price stability.

Profit-Taking Fuels Near-Term Volatility

Recent weeks have seen bond yields climb as investors lock in gains from earlier declines. The 10-year yield, which dipped to 6.48% in mid-April—its lowest since early 2022—has rebounded to 6.95%, reflecting a mix of profit booking and cautious positioning ahead of the RBI’s policy communication. This volatility contrasts with the RBI’s accommodative bias: in April, the central bank cut the repo rate by 25 basis points to 6%, citing easing inflation and a need to support growth.

The disconnect between the policy easing and the yield rise underscores market skepticism. “Investors are questioning whether the RBI’s shift to an accommodative stance is premature, given lingering risks such as elevated core inflation and global supply chain disruptions,” said a Mumbai-based fixed-income analyst.

RBI Policy Minutes: The Key Catalyst

The April policy minutes, due for release shortly, will clarify the Monetary Policy Committee’s (MPC) internal debate. While the April cut was unanimous, traders will scrutinize language on inflation risks, growth sustainability, and the timing of further easing. A dovish tilt—emphasizing growth over price stability—could push yields lower, while hawkish undertones might trigger a further rise.

Underlying Drivers: Growth, Inflation, and Liquidity

1. Growth Momentum: The RBI’s April projections forecast 6.5% GDP growth for FY2026, supported by agriculture and services. However, weak merchandise exports and uneven manufacturing recovery cloud the outlook. A downgrade to growth estimates in the minutes could alleviate pressure on yields.
2. Inflation Dynamics: Headline inflation has eased to 3.6% in early 2025, within the RBI’s 4% target. Yet, core inflation—excluding food and energy—remains sticky at 5.8%, signaling underlying price pressures. If the minutes highlight concerns about second-round effects, markets may price in a slower easing cycle.
3. Liquidity Conditions: The banking system’s surplus liquidity, now at ₹1.5 trillion, has eased funding pressures. The RBI’s open market purchases and reverse repo auctions have stabilized short-term rates, but corporate bond spreads remain elevated, reflecting credit risks.

Global Crosscurrents

India’s bond market is also sensitive to external factors. A weakening U.S. dollar and falling global yields have reduced external pressure, but geopolitical risks—such as Middle East tensions impacting oil prices—could reignite inflation fears.

Conclusion: A Delicate Balance Ahead

Indian bond yields are caught between two forces: the RBI’s accommodative bias, which should cap upward momentum, and near-term risks tied to profit-taking and inflation uncertainty. Historical context provides perspective: yields have ranged between 5.76% (2020) and 8.18% (2018), with the current level near the lower end of recent cycles.

If the RBI’s minutes confirm a data-dependent approach—prioritizing growth without compromising inflation control—the 10-year yield could settle in a range of 6.5%–7.0%. However, a hawkish surprise or a resurgence in inflation could test the upper end of this range. For now, traders are right to focus on the minutes: they will set the tone for yields in a critical year for India’s economic recovery.

Data sources: RBI policy summaries, Bloomberg bond yield data, and Fusion Media historical benchmarks.