 "Bond market to remain under pressure; rupee seen range-bound in 2026")
The bond market is expected to remain under pressure in 2026 as heavy supply, particularly of state government securities, is expected to keep yields higher, and with the rate-cut cycle seen as largely over, the benchmark 10-year yield is expected to trade in a 6.50-6.75 per cent range in the near term and edge up further thereafter, said market participants.
On the other hand, the rupee, which was the worst-performing Asian currency in 2025, is likely to trade with a modest appreciating bias in the near term, supported by a seasonally stronger current account position in the March quarter and expected foreign direct investment (FDI) inflows, though gains could be capped by headwinds from higher US tariffs and uncertain global flows, according to market participants. While the overall outlook for 2026 remains a bit constructive, the currency is expected to end the year with a marginal depreciation, well below its typical annual fall of around 3 per cent, with the trajectory in the latter half hinging on trade deal developments, the Union Budget, and capital flow dynamics.
“The view on the rupee in the near term is a bit constructive. From a current account perspective, the fourth quarter is generally positive, and while there will be a headwind this year (2025) in the form of higher US tariffs, the overall picture still improves. We think the depreciation next year (2026) could be lower than the usual 3 per cent, near-term positive, but by year-end, a marginal depreciation, with March-end levels around 90 to the dollar,” said Shailendra Jhingan, head-treasury and economic research, ICICI Bank.
On bonds, he said: “The challenges will remain in 2026, given that supply will still be very high, especially for state loans. We are at the end of the rate cycle, and there are likely no more cuts, so bond yields could be headed a little higher. In the near term, the 10-year yield could trade in a 6.5-6.75 per cent range. Index inclusion may provide some marginal support, but nothing significant, and if there are no further rate cuts, the natural bias of the yield curve will be towards steepening.”
The yield on the benchmark 10-year government bond settled at 6.59 per cent, 17 basis points (bps) lower, during calendar year 2025 (CY25). Despite the Reserve Bank of India (RBI) Monetary Policy Committee’s (MPC’s) 125 bps rate cut during the year, bond yields remained high because of supply pressure.
Even as the RBI continues to support liquidity through open market operations (OMOs) and swap auctions, it has not transmitted into the bond market.
In CY24, the yield on benchmark bond had softened by 41 bps.
The rupee depreciated by 4.74 per cent during the year to settle at 89.88 per dollar, pressured by delay in US trade deal and foreign outflows. In CY24, the rupee had depreciated by 2.8 per cent against the greenback. CY25 was the rupee's worst year since CY22 when it fell over 10 per cent against the dollar in the aftermath of Russian invasion of Ukraine.
The local currency depreciated sharply during the year, emerging as one of the worst performers among Asian peers. The weakness was driven by uncertainty around US trade policies, persistently high interest rates in developed markets such as the US and Japan, a key source of carry trade capital, and sustained foreign institutional investor (FII) outflows as global capital gravitated towards higher-return markets. The rupee touched a low of around 91, before retracing below 90, aided by strong and timely intervention by the RBI via dollar sales.
“As we enter the New Year, expectations of a more favourable Indo-US trade environment, potential return of FII flows, and a strong balance of payments position are likely to support rupee resilience in 2026. The currency is expected to trade in a range of 89-91.50, with a positive bias,” said V R C Reddy, treasury head at Karur Vysya Bank.
With the rupee having already tested levels around 91 to the dollar, that zone is seen as the upper end while 89 is viewed as the downside in a more favourable scenario. Overall, the rupee is expected to trade in a relatively narrow 89-91 range, reflecting reduced external stress rather than a strong appreciation bias.