



Liquidity, not just rate cuts, holds the key to cooling Indian bond yields
Subscribe to enjoy similar stories. Despite a 125-basis-point rate cut by the Reserve Bank of India (RBI) in 2025, government bond yields have refused to cool off, leaving a growing disconnect between the bond market and policy actions. Since the beginning of February, RBI’s Monetary Policy Committee has cut the policy repo rate by 125 bps.
While yield on the benchmark 10-year government bond has fallen from a high of 6.72% in February to 6.24% in May, it reversed those gains to 6.50% levels since late August when the US slapped 50% tariffs on Indian goods. On Friday, yield on the 10-year government bond—the most liquid paper—ended at 6.60%, 10 bps higher since the rate-setting panel announced its latest 25 bps cut in repo rate on 5 December. At the heart of the problem is liquidity.
“You need liquidity. Lots and lots of it. To the tune of ₹2–2.5 trillion more," a senior treasury official at a private bank said.
While RBI has announced open market operations (OMOs) and other liquidity measures, market participants argue these have largely been offset by foreign exchange interventions and bond redemptions, making it a transient form of liquidity rather than a durable one. “Rate cut transmission to the bond market has been constrained by tight liquidity conditions, elevated supply expectations and global rate volatility," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said.
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