Navigating Indian Government Bonds: A Bullish Case Below 6.30% Amid RBI Backstops and Global Yield Shifts

The Indian 10-year government bond yield has stabilized near 6.27% as of early May 2025, creating a compelling entry point for investors seeking to capitalize on a confluence of supportive macroeconomic forces. With the Reserve Bank of India (RBI) poised to inject ₹250 billion into bond markets via open market operations and global yields showing signs of softening, the stage is set for a tactical bullish play. However, the near-term trajectory hinges on managing risks from elevated state debt supply and U.S. Treasury dynamics.

The RBI’s Liquidity Lifeline

The RBI’s aggressive liquidity management has been the primary driver of recent yield declines. Banking system surplus liquidity has surged to ₹1.5 trillion, bolstered by variable-rate repo auctions and the central bank’s direct purchases of government bonds. This has not only anchored yields but also emboldened private banks to become net buyers—₹92.6 billion of government debt was purchased in a single day in late April, the largest such transaction in over eight years.

The upcoming ₹250 billion bond purchase planned for mid-May aims to further absorb supply pressures. This is critical as states prepare to auction ₹2 trillion in debt during the quarter, a record pace that could otherwise weigh on yields. The RBI’s actions signal a clear priority: maintaining surplus liquidity to counterbalance supply-side headwinds.

Global Yields: A Tailwind or a Threat?

India’s bond market is now inextricably linked to global yield trends. While the U.S. 10-year Treasury yield has fluctuated between 4.4% and 4.5% since April, traders are pricing in a 25-basis-point rate cut by the Federal Reserve by year-end. If realized, this would amplify downward pressure on Indian yields, especially as inflation expectations here have collapsed to a six-year low of 3.16%.

However, the U.S. Treasury’s upward drift to 4.53% in early May highlights the risk of a divergence. Should U.S. yields climb further due to resilience in labor markets or fiscal hawkishness, Indian yields could face upward pressure. Yet, for now, the global environment leans bullish: a 10-basis-point decline in German yields to 2.4% in April underscores a broader risk-off sentiment that benefits emerging market bonds.

State Debt Supply: A Double-Edged Sword

The ₹2 trillion in state debt supply this quarter poses a challenge. State Development Loans (SDLs) have already seen yields climb to 6.71%, reflecting liquidity strains and investor caution. However, the RBI’s backstop ensures that government bond yields will remain insulated from these pressures.

Crucially, the RBI’s dividend payout of ₹1.76 trillion to the federal government—set to materialize by mid-May—will further boost liquidity, potentially easing the burden of state debt auctions. Traders note that private banks, now aggressive buyers of government paper, are likely to remain net purchasers despite the state supply surge.

Tactical Entry Points: Bullish Below 6.30%

The 10-year benchmark yield’s drop to 6.22% on May 14 marks a critical juncture. Investors should:
1. Deploy capital aggressively if yields dip below 6.25%, targeting a move toward 6.20%—a level that would reward buyers of the 6.33% 2035 benchmark bond.
2. Avoid chasing rallies above 6.35%, where profit-taking and U.S. Treasury volatility may dominate.
3. Monitor technicals: A breach of 6.20% could signal a deeper downtrend, while a sustained close above 6.35% would invalidate the bullish case.

Risks to the Bullish Thesis

• U.S. Yield Hikes: A Fed pivot toward tightening could reverse global momentum, pressuring Indian yields upward.
• State Debt Demand Collapse: If SDL auctions falter, liquidity could tighten, undermining the RBI’s efforts.

Conclusion: Act Now—But Stay Vigilant

The interplay of RBI liquidity support, softening global yields, and manageable state debt risks creates a narrow but actionable window for bullish bets in Indian government bonds. Yields below 6.30% are a buy, especially with the RBI’s balance sheet firmly behind the market. Yet, investors must remain nimble: allocate incrementally, and be prepared to exit if U.S. Treasury yields stabilize or state bond demand falters.

The next few weeks will test whether India’s bond market can sustain its downward bias—or whether external headwinds demand a tactical retreat. For now, the path of least resistance points lower, and the time to act is now.