Indian government bond yields slipped to a four-month low after the Reserve Bank of India (RBI) announced fresh liquidity measures to ease stress in the bond market. The benchmark 10-year yield fell nearly 10 basis points on Wednesday to close at 6.538%, compared with 6.637% in the previous session.

The move followed the RBI’s decision to buy Rs 2 lakh crore worth of government bonds in four tranches through December and January. It also plans a $10 billion dollar-rupee foreign exchange swap next month. These steps are aimed at boosting liquidity. This is to cool yields, which had climbed due to tax outflows and the RBI’s earlier currency market interventions.

In 2025 so far, the central bank has injected around Rs 6.5 lakh crore through open market bond purchases. This is the highest annual infusion on record. Seasonal liquidity tightness and the need for smoother transmission of earlier rate cuts had increased pressure on the bond market.

Experts say the RBI had little choice but to act. Lakshmi Iyer, Group President–Investments and CEO at Bajaj Alternate Investment Management, said rising bond supply and tight liquidity had pushed yields higher. She described the market as “wounded and therefore behaving lethal.” She added that the RBI’s move helped pull yields back from levels close to 6.7%.

Dhawal Dalal, President and CIO–Fixed Income at Edelweiss AMC, called the measures a “very big bazooka.” He said uncertainty over January bond purchases and higher state bond issuances had unsettled markets. Moreover, a combined liquidity infusion of around Rs 3 lakh crore should help stabilise yields.

The rupee also played an indirect role. Iyer noted that RBI efforts to support the currency drained liquidity, while foreign portfolio investors sold about Rs 12,500 crore worth of debt in December, adding to pressure. Dalal said forex swaps raised short-term funding costs, leading to pressure on sales across government and corporate bonds. This was especially evident at the shorter end of the curve.

What it means for you

Lower bond yields usually mean gains for existing bondholders and support returns for debt mutual funds, particularly long-duration funds. Over time, easing yields can also reduce borrowing costs. However, if yields stabilise at lower levels, future debt fund returns may moderate.

On the outlook, Iyer sees room for at most one more rate cut. Timing remains uncertain, however. Dalal expects inflation to ease further and believes the 10-year yield could fall below 6.25% in 2026. This is likely even if policy rates stay unchanged.

Tradz by EquityPandit leverages advanced AI technology to provide you with powerful market predictions and actionable stock scans. Download the app today and 10x your trading & investing journey!