Indian Bond Yields Poised for Upside Amid Mixed Economic Signals

India’s government bond yields are starting to climb again. Why? Because markets are juggling a lot right now: shifts in monetary policy, rising geopolitical tensions, and a lot of global economic uncertainty. After falling for a while (thanks to support from the RBI), yields may be heading in the other direction.

RBI’s Rate Cuts and Liquidity Boosts

Earlier this year, the Reserve Bank of India cut its key interest rate by 50 basis points, bringing the repo rate down to 6.00%. It was the first move like this since the pandemic. In addition, the RBI pumped ₹1.25 lakh crore into the system through bond purchases in May. This kept the banking sector flush with cash and helped bring the 10-year government bond yield down to 6.33%, a level we hadn’t seen in three years.

Geopolitical Tensions Shake Markets

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Then things got tense. In May, India-Pakistan tensions flared up, with drone strikes and military responses making headlines. Investors got nervous. As a result, bond yields jumped, rising to 6.40%, the highest in months. The rupee also slipped, showing just how jittery the market had become.

Foreign Investors Turn Cautious

Foreign Portfolio Investors (FPIs) have had a rocky relationship with Indian debt lately. India’s upcoming inclusion in JPMorgan’s emerging market bond index could bring in around $20 billion over the next ten months. But recent political tensions and global worries, like rising U.S. yields, have spooked investors. In April alone, FPIs pulled $1.6 billion out of Indian bonds.

Corporate Bonds Stay Hot

Despite the headwinds, Indian companies still raise big money through corporate bonds. In 2024, firms issued a record ₹10.67 trillion, up 9% from the year before. And 2025 started strong too, with $4.5 billion worth of bonds sold in just the first five trading days of April. Lower yields and strong demand are helping drive this trend.

Inflation Falls, But Growth Concerns Linger

On the bright side, inflation is cooling. Retail inflation dropped to 3.34% in March, the lowest since August 2019. That’s given the RBI some breathing room to keep its policy stance loose. But slower growth is still a concern. The economy is expected to grow by just 6.5% through March 2026, which could complicate future rate decisions.

What’s Next?

The direction of bond yields will likely depend on domestic and global factors. RBI’s support has helped so far, but foreign investor sentiment and geopolitical risks could keep yields under pressure. For investors, staying informed and nimble will be key in navigating this changing bond market landscape.