MUMBAI: Bond markets have entered a phase of profit-taking as investors reassess their positions amid concerns about a prolonged pause in policy rates by the Reserve Bank of India (RBI).
On Monday, the 10-year G-Sec closed higher at 6.28%, up 5 basis points (bps) from its Friday’s close of 6.23%. In two consecutive sessions, the 10-year G-Sec has gained nearly 10 bps. Last Friday, a policy stance reversal from ‘accommodative’ to ‘neutral’ triggered selling pressure in G-Secs as players scrambled to adjust to the shifting monetary landscape.
“The MPC outcome carried multiple surprises that unsettled the market, particularly the unexpected change in stance. With terminal rates already at the bottom of the cycle, this has triggered a repositioning in the 10-year G-Sec, which is expected to move within a narrow range of 6.10-6.30% in the near term, with a possible high of around 6.30%,” said VRC Reddy, head of treasury at Karur Vysya Bank.
Markets were initially expecting two to four rate cuts in FY26, but with a pause now in play, yields have begun to climb. Typically, yields move 80-100 basis points higher than the terminal rate, which would place the 10-year yield in the range of 6.30-6.50%, aligning with current market expectations. Meanwhile, the India-US benchmark bond yield differential widened to 178-179 bps from 173-175 bps last week.
“While the India-US rate differential influences investments, other factors like sovereign rating, inflation, currency, and twin deficits also shape market dynamics. Indian macros remain supportive, making interest rate differential a lesser driver of Indian yields at this stage,” says Churchil Bhat, executive vice-president & debt fund manager at Kotak Life Insurance Company.
He adds, “The recent FPI purchases of Indian debt are largely driven by Index Inclusion flows, which are generally considered stable.”
Year-to-date, until June 5, FPI investments in Indian debt markets have attracted $3 billion; however, in June, they have been net sellers to the tune of $2.5 billion.
A treasury head from a foreign bank said: “India stands out in emerging markets. With a strong inflation outlook and a positive real rate, it reinforces its investment appeal.”
However, Reddy believes that foreign portfolio flows are likely to remain muted until there is greater clarity on global factors, such as the US-China trade negotiations, a possible softening of the US dollar, and the upcoming US Fed policy direction. “As long as bond yields remain attractive in the US and Japan, we may not see significant foreign interest in Indian debt markets. However, domestic demand remains robust, with banks, insurance companies, and mutual funds well-positioned to absorb primary issuances comfortably,” he adds.
Sharing a similar view on foreign flows, Gopal Tripathi, head of treasury at Jana Small Finance Bank, stated, “Foreign flows are expected to remain subdued in the short term due to the compressing interest rate differential. In the early 2000s, we saw decent foreign inflows despite a narrow spread, as robust growth dynamics and a strengthening rupee contributed to this trend. Once sentiment on the rupee turns positive, flows could increase despite the narrowing spread.” Tripathi expects the rupee to trade in the range of Rs 84.5 to Rs 86.5 against the dollar. Bhat also believes that the rupee appreciation will remain muted compared to other EM peers due to the RBI’s sizable dollar short position in the forward book.
In the equities market, FPIs have recorded a net outflow of $8 billion so far in 2025. But analysts believe the reverse flow of foreign capital—absent for the last few quarters—may gradually resume. However, premium pricing relative to global benchmarks remains a challenge in attracting large foreign inflows at higher valuations.
Soumya Kanti Ghosh, group chief economic adviser (CEA) at State Bank of India, said “in the Indian context, capital flows are more sensitive to growth differential rather than interest rate differentials. It is thus important that growth continues to remain buoyant”, he said.
Robin Arya, smallcase manager and founder of GoalFi, said: “Global trade tensions remain a concern and could pose intermittent risks to market momentum. The outlook for FY26 is cautiously optimistic.”
Source: The Financial Express
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