RBI rate cuts have failed to ease bond yields. Liquidity tools may be next

Subscribe to enjoy similar stories. MUMBAI: The Reserve Bank of India may have delivered a cumulative 125-basis-point cut in the repo rate since February 2025, but financial conditions have failed to ease in ways typically associated with monetary loosening. With the rate-cut cycle now widely expected to pause, the central bank is likely to rely increasingly on liquidity measures to ease conditions instead, economists said.

In a report dated 11 February, Barclays said financial conditions have actually tightened in recent months, driven largely by government and corporate bond markets. Over the one-year period since the start of the easing cycle, policy rate cuts were accompanied by durable liquidity infusion via open market operation purchases and foreign exchange swaps. Still, the yield on the 10-year benchmark government bond is higher by 7 basis points (bps) over the one-year period since the easing cycle began in February 2025, reflecting supply concerns from both the Centre and states and weak investor appetite rather than the policy stance.

The yield currently stands at 6.67%. The easing cycle began with a 25-basis-point cut in February 2025. Government borrowing costs initially declined, with yields falling by about 60 bps by May 2025.

But after mid-2025, yields resumed an upward trend even as policy rate cuts continued through December 2025. “This statement that this easing cycle has not been associated with easing in bond yields is a fact. It’s not a prediction," Gaura Sengupta, chief economist at IDFC First Bank said.