In December 2025, India’s Monetary Policy Committee cut the Repo Rate by 25 basis points. RBI Governor Sanjay Malhotra referred to India’s macroeconomic situation as a rare Goldilocks period, with low inflation at 2.2% and GDP growth at 8%. However, the Government is getting limited benefit from the Goldilocks period, as the yields on Government bonds (G-secs) have not moved down in sync with the RBI repo rate cuts. In this article, we will understand why G-secs yields have risen in the recent months despite the RBI repo rate cuts.
RBI repo rate cuts in 2025
The RBI started the current interest rate-cutting cycle in February 2025 with a 25-basis points cut in the Repo Rate from 6.50% to 6.25%. Since then, the RBI has cut the Repo Rate multiple times, bringing it down to the current level of 5.25% (February 2026). Over the last one year, while the RBI cut the Repo Rate by 125 basis points from the peak, the yields on G-secs have not moved in tandem.
(Source: https://tradingeconomics.com/india/government-bond-yield)
The above chart shows that yields on the 10-year G-secsfell in the first half of 2025, along with the Repo Rate cuts. The 10-year bond yields fell from levels of around 6.74% in February 2025 to around 6.24% in June 2025. In the June 2025 MPC meeting, the RBI cut the Repo Rate by 50 basis points to 5.50% and changed the policy stance from ‘accommodative’ to ‘neutral’.
Since June 2025, yields on 10-year G-secs have changed direction and started going up. From June 2025, the 10-year G-sec yields have climbed from levels of around 6.24% to the current (February 2026) level of around 6.75%. So, the entire yield decline has reversed, and gone back to where it was a year back in February 2025.
Why have the 10-year G-sec yields risen?
In the earlier section, we saw how the 10-year G-sec yields have risen in the last few months. Now, let us understand the reasons for the rise in yields.
1. Change in MPC stance in June 2025
The MPC changed its monetary policy stance from ‘accommodative’ to ‘neutral’ in June 2025. The markets interpreted that as the RBI will go for a long pause, with the probability of any future rate cuts low and inflation data dependent. As a result, the G-secs bond yields rose by 10-12 basis points in a couple of days, post the MPC meeting.
2. US tariffs on Indian goods in August 2025
In August 2025, the US Government imposed 50% tariffs on Indian goods. First, a 25% reciprocal tariff was imposed, and later an additional 25% penalty tariff was imposed for Russian crude oil purchases. The tariffs led to the Indian Rupee depreciating against the US Dollar. As a result, Foreign Portfolio Investors (FPIs) sold Indian G-secs, to cut losses, resulting from the Indian Rupee depreciation. FPI selling of G-secs has pushed down prices and increased yields.
3. GST rates rationalisation in September 2025
In August 2025, in his Independence Day speech, Prime Minister Narendra Modi announced next-generation reforms, including the rationalisation of GST rates. Post the announcement, the GST Council announced the GST rate reduction on many goods and services from 12% to 5%, and nil rate (0%) on some, effective from 22nd September 2025.
While the GST rate cuts benefitted customers, markets feared that the rate cuts will lower the Government’s GST collections. The bond markets feared that lower tax collections would increase the fiscal deficit and that the Government may borrow more. As a result, the G-secs yields went up.
4. India;s inclusion Bloomberg Bond Index delayed
The Indian G-secs were expected to be included in the Bloomberg Global Aggregate Bond Index. However, in January 2026, Bloomberg announced the decision has been delayed due to operational and market-infrastructure issues. It said the decision will be reviewed and an update will be provided by mid-2026.
The inclusion of G-secs in the global bond index would have steadily brought in billions of US Dollars in Indian G-secs steadily over the months. However, the delay spooked sentiment, leading to a rise in G-sec yields.
5. Higher Government borrowing in Budget 2026
On 1st February, the Finance Minister, Nirmala Sitharaman, presented Budget 2026. For FY 2026-27, the Government’s gross market borrowings are estimated at Rs. 17.20 lakh crores, and net market borrowing from G-sec bonds is estimated at Rs. 11.70 lakh crores. The borrowing numbers are higher than market estimates.
On Budget Day, the bond markets were closed as it was a Sunday. However, on Monday, bond yields spiked following the Government’s budget announcement of the borrowing planning for 2026-27.
6. MPC announcement in February 2026
In its February 2026 meeting, the MPC left the Repo Rate unchanged at 5.25% and the ‘neutral’ policy stance. The RBI upped the FY 2026 GDP growth forecast to 7.4%. The inflation forecast for Q1 FY 2027 has been raised from earlier 3.9% to 4.0%, and for Q2 FY 2027 from earlier 4.0% to 4.2%.
The increase in inflation forecast to 4% and above, which is close to the RBI’s target, reduces the probability of future Repo Rate cuts. As a result, the bond yields hardened post the MPC monetary policy announcement.
Where are G-sec yields headed?
During the course of FY 2026-27, the bond markets will keep a close watch on how the Central Government proceeds with its borrowing program. The markets will also track the issuances of State Development Loans (SDLs) by various State Governments.
A higher supply of G-secs from the Central Government and SDLs from the State Governments than market expectations will keep yields at higher levels or push them further higher. On the other hand, lower bond issuances by Central and State Governments, liquidity management measures by RBI, a Repo Rate cut by RBI, inclusion of Indian G-secs in global bond indices, an increase in FPI investments in Indian G-secs, etc., can bring down yields.