Indian Government Bond Yields Rise Amid Profit Booking and Geopolitical Tensions

The Indian government bond market faced headwinds in late April 2025 as traders booked profits, foreign portfolio investors (FPIs) exited en masse, and geopolitical risks clouded the outlook. Despite the Reserve Bank of India’s (RBI) efforts to stabilize yields through open market operations (OMO), the benchmark 10-year bond yield edged higher to 6.3910% by April 30, reflecting a confluence of global and domestic pressures.

Yield Movements: Profit Booking and New Bond Issuance

The month of April saw Indian bond yields rebound after a sharp decline in early April. By April 28, the 10-year yield had risen to 6.3910%, up from a low of 6.30% on April 24—the latter marking its lowest level since issuance in October . The upward trajectory was fueled by profit booking ahead of a new 10-year bond issuance scheduled for May 2, 2025. Traders reduced positions in existing bonds to prepare for the new benchmark paper, a strategy that temporarily tightened liquidity and pushed yields higher.

By April 30, the yield had climbed further to 6.3910% (as of 11:45 a.m. IST), with analysts noting that stretched long positions—built during a prior rally that saw yields drop nearly 30 basis points (bps)—were being unwound. The RBI’s announcement of a ₹1.25 trillion OMO bond purchase to stabilize markets provided some relief, but traders remained cautious ahead of the upcoming holiday and new issuance.

Key Drivers of the Sell-Off: FPI Outflows and Global Yield Dynamics

The sell-off was not solely domestic. FPIs withdrew a record $2.27 billion from Indian debt markets in April—the largest monthly outflow since May 2020—driven by narrowing yield differentials with U.S. Treasuries. By mid-April, the spread between India’s 10-year yield (6.33%) and the U.S. 10-year (4.35%) had compressed to 200 bps, the narrowest since 2004. This reduced the relative appeal of Indian bonds, prompting FPIs to reallocate to U.S. debt amid rising global inflation fears.

Analysts highlighted two critical factors behind the exodus:
1. Yield Compression: The narrowing spread eroded the risk premium for emerging market debt, making U.S. assets more attractive.
2. Geopolitical Risks: Tensions between India and Pakistan, coupled with global trade tariff concerns, led investors to reduce exposure to emerging markets.

Domestic Resilience Amid Global Headwinds

Despite FPI outflows, domestic demand for government bonds remained robust. The RBI’s OMO purchases—such as the ₹20,000 crore auction on April 29, which attracted bids twice the notified amount—signaled strong investor confidence. Public-sector banks emerged as key buyers, offsetting foreign selling. Additionally, India’s easing inflation (projected to fall to 4.3% in Q1 2025) and expectations of further RBI rate cuts (with OIS rates at 5.63% for five-year maturities) provided tailwinds for bond prices.

However, the rupee’s depreciation to 85.25 per dollar by April 29—driven by geopolitical risks—added pressure on bond markets. This contrasted with its year-to-date appreciation of 0.42%, underscoring the volatility in currency markets.

Outlook: Near-Term Volatility, Long-Term Stability

Traders anticipate near-term consolidation in bond yields as investors await the RBI’s new bond issuance and geopolitical developments. The RBI’s Q2 net debt supply reduction (due to OMO purchases) and supportive liquidity conditions suggest a favorable environment for bond prices over the medium term.

Yet risks remain:
- Global Rates: Rising U.S. yields could further compress spreads, prompting more FPI outflows.
- Policy Uncertainty: While the RBI’s dovish stance is supportive, any shift in global inflation trends could disrupt domestic markets.

Conclusion

Indian government bond yields closed April 2025 at 6.3910%, reflecting a tug-of-war between profit booking and domestic resilience. While FPI outflows and geopolitical risks introduced volatility, the RBI’s liquidity measures and stable domestic demand offer a cushion. Historically, yields have averaged around 6.4% in recent quarters, and with inflation easing and rate cuts on the horizon, the medium-term outlook remains constructive. Investors should monitor the May 2 bond auction and global yield dynamics closely, but the fundamentals suggest a gradual downward trajectory for yields in the second half of 2025.