Summary of this article
Bond yields have limited scope of falling
Investors reallocate funds in equities, changes in bank investment rules also drag investments in bonds
Bonds have a limited scope of rallying as household savings turn to equities. Along with this, changes in investment rules of banks have also dampened the demand for dated securities.
The 10-year benchmark government bond (G-Sec) yield has barely fallen despite the 125 basis points cut in the key policy repo rate delivered by Reserve Bank of India in 2025. Experts see the 10-year bond yield to move in a range of 6.25-7.0 per cent during 2026 and that there was little scope for further gains from current levels of 6.60 per cent.
The 10-year bond yield has risen around 35 basis points since lows in May last year. This has also kept borrowing costs elevated despite the RBI’s rate cuts. Outflows from foreign investors given turmoil in the global trade and tariffs situation also led to rise in yields, with US imposing 50 per cent tariffs on India, the highest among all Asian peers.
“There is a structural change which has happened at a macro level — savings are moving toward equity compared to fixed income,” Bloomberg reported Shailendra Jhingan, head of treasury at ICICI Bank, as saying. He also said revised investment rules made over the past couple of years have made banks more wary about investing in long term bonds. The change in rules of banks’ investment books has limited the ability for them to move bonds between different trading books, he said.
Additionally, changes in taxation have also reduced the appeal of debt mutual funds, which has thereby reduced investments of mutual fund houses in bonds. Meanwhile, changes in rules for pension funds, which used to hold long term bonds, have been allowed to invest more in equities, reducing the overall allocation and lure in bonds.
Many investors are also looking to reallocate more funds in equities, as bond yields are seen to have a limited scope of fall with the Reserve Bank of India’s rate easing cycle expected near its close. Supply pressures is also expected to intensify going into the new financial year which begins April 1.
“Next year the issue becomes that the gross supply will be high because redemptions are also high, around Rs. 10 lakh crore centre plus state (bonds will redeem in FY2026),” Gaura Sengupta, chief economist at IDFC First Bank said.
Jhingan told the wire agency that he expects the central government to borrow around Rs. 16.5 lakh crore in the upcoming financial year, and states to raise around Rs. 13.5 lakh crore. This will take the total debt supply to around Rs. 30 lakh crore, up from Rs. 27.5 lakh crore gross borrowing this financial year.
