Summary of this article
Money market yields jumped despite RBI repo cut, liquidity injection
Edelweiss cites credit demand, liquidity volatility, funding mismatch
Higher yields improve fixed-income prospects for six-month horizon
Money market yields in India have seen a sharp jump since early December 2025, creating a window that fixed-income investors may want to watch closely. As per Edelweiss Mutual Fund, the uptick has come even as the Reserve Bank of India (RBI) cut the repo rate by 25 basis points to 5.25 per cent in the December MPC meeting, and injected around Rs 4.5 lakh crore of liquidity between December 6 and January 20 through open market operations (OMO) bond purchases and FX buy-sell swaps.
Yet, short-term yields have moved higher. Edelweiss notes that as of January 20, 2026, the 3-month bank CD(Certificate of Deposit) yield stood at 6.88 per cent, while the 6- and 12-month bank CDs were yielding 7 per cent and 7.10 per cent, respectively, levels last seen in March 2025, when the policy rate was 6.25 per cent.
Usually, when the repo rate is lowered, bond yields tend to fall as the cost of borrowing drops, making existing (older) bonds with higher yields more attractive.
The fund house attributes this move to a combination of factors, including a rising credit-deposit ratio, volatile banking system liquidity, and a sentiment shift. According to Edelweiss, the credit-deposit ratio has moved up to 83 per cent as strong demand for credit post “GST 2.0” increased banks’ funding requirements. It also points to a mismatch in demand – banks wanting one-year money, while mutual funds were seeking 3-month CDs.
At the same time, liquidity surplus has remained volatile since December. Edelweiss flags Foreign Exchange (FX) intervention, advance tax, GST payments, and higher currency in circulation (CIC) as key drains, despite the RBI’s liquidity injections. The report adds that RBI action could follow to stabilise liquidity conditions. “We expect RBI to step in and stabilize banking system liquidity through various means,” it notes.
The central takeaway for investors is that the current rise in yields may actually improve opportunities in short-to-medium duration fixed income. As per Edelweiss Mutual Fund, the AAA CPSE yield curve has shifted upward since November 30, 2025, with 2- to 5-year AAA CPSE bonds yielding 7 per cent to 7.3 per cent, up 25-50 basis points over the period.
“This may be a great time to consider some allocation in fixed income with an investment horizon of at least six months,” Edelweiss says, adding that “at such levels, risk-reward ratio is clearly in favor of the investors.”
Edelweiss also maintains that India’s macro backdrop remains supportive for FY27, with headline inflation expected to average 3.5 per cent to 4 per cent and real GDP growth likely at 6.5 per cent, supported by higher credit demand and fiscal consolidation.
