RBI's liquidity measures drive short-term bond rally, widening yield spread

The yield spread between the three-year government bond and benchmark 10-year bond has increased by more than three times to 48 basis points, against 15 bps at the start of FY26

The yield spread between the three-year government bond and benchmark 10-year bond has increased by more than three times to 48 basis points, against 15 bps at the start of the financial year (FY26). A combination of monetary policy easing, abundant liquidity infusion in the system, and a 100-bp cut in the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) in its most recent monetary policy review weighed on the bond yields, particularly on short-duration bonds.

 

“Post rate cuts and liquidity infusion by the RBI, short term rates have fallen more than long term yields,” said a