Govt bond yields increase 9 basis points on no new liquidity steps

The yield on the benchmark 10-year government bond hardened by 9 basis points to settle at 6.74 per cent

Yields on government bonds on Friday were up owing to the Monetary Policy Committee not announcing additional liquidity measures, and also due to longer-duration papers at the weekly auction having a cut-off higher than expected.

 

Additionally, the cycle of rate cuts is seen nearing its end amid steady growth and inflation gradually firming up, which pushed the yields higher.

 

The yield on the benchmark 10-year government bond was up 9 basis points, highest single day gain since August 18, 2025, to settle at 6.74 per cent. 

“A section of the market was expecting an announcement on open market operations (OMOs) and with growth seen holding up and the inflation rate inching up, the rate-cut cycle is now seen to be over. The cut-off on longer-duration paper was higher,” said an executive at a primary dealership.

 

“There could be some buying at 6.75 per cent (the yield on the benchmark 10-year government bond),” he added.

 

The cut-off yield on the 2065 paper was set at 6.49 per cent, as against the market expectation of 6.47 per cent.

 

The yields remain high due to the gross borrowing plan for the coming financial year being higher than expected.

 

On elevated borrowing, Reserve Bank of India (RBI) Deputy Governor, T Rabi Sankar on Friday said the central bank planned to conduct a switch auction worth ₹2.5 trillion to manage the high gross supply next financial year.

 

He said the RBI would also conduct a buyback auction, the amount for which had not been decided. 

 

Net liquidity in banking was in surplus — by ₹2.11 trillion — on Thursday, the latest data from the RBI showed. 

 

Consequently, on Friday the overnight weighted average call rate was 5.06 per cent, and the tri-party repo rate was 4.33 per cent.

 

While yields on government bonds continue to harden despite the RBI’s liquidity infusion, the overnight weighted average call rate and tri-party repo rate have declined 50 basis points and 28 basis points, respectively, so far in 2026.

 

Sanjay Malhotra, RBI governor, said during the post-monetary policy press conference it was the central bank’s duty to ensure ample and sufficient liquidity to meet the productive needs of the economy.

 

He said the objective was to ensure effective transmission in monetary policy across all segments, and not just overnight and money markets. Transmission should cover government securities, corporate bond markets, and the broader credit markets.

 

Banks have been increasingly parking funds in the standing deposit facility. They parked ₹3.57 trillion in the facility on Thursday, the latest data showed.

 

The governor said over the medium to long term, there was a strong correlation among three markets — the market for the tri-party repo rate, the call money market, and the repo market — which is why the call money rate continues to be targeted as the operating benchmark.

 

He said in the short term, day-to-day fluctuations and temporary misalignments could occur.

 

However, at present, there is no intention to make any immediate changes. While there are different ways of approaching issues such as the corridor and its management, these are not being considered at this stage. This is a cyclical issue, and for now, no further changes are envisaged, he said.