New Delhi: India’s central bank will need to pump significantly more liquidity into the banking system, as four interest-rate cuts and record debt purchases have yet to ease elevated yields, market participants said.
The Reserve Bank of India is expected to buy as much as 5 trillion rupees ($55 billion) of bonds between now and the end of March 2027, according to Aditya Birla Sun Life AMC Ltd. Nomura Holdings Inc. estimates purchases of about 2.5 trillion rupees in the year starting April 1, while PGIM India Asset Management Ltd. expects purchases of as much as 2 trillion rupees in the coming months.
The benchmark 10-year yield on Monday surged back to nearly the same level seen before the RBI began cutting rates early last year. The authority slashed rates by 125 basis points in 2025 and injected unprecedented liquidity, yet only about 10% of those reductions have flowed through to bond yields. That compares with an average pass-through of 83% in the previous cycles, according to Emkay Global Financial Services Ltd.
“India is having transmission trouble,” said Kaustubh Gupta, chief investment officer for fixed income at Aditya Birla Sun Life AMC. Improving bond-market transmission through liquidity infusion and an increase in money supply will “drive the theme for 2026,” he said, referring to their role in pushing bond yields lower.
The RBI has injected a record 14.5 trillion rupees of liquidity since end-December 2024 through cash reserve-ratio cuts, open-market bond purchases and foreign-exchange swaps, according to Kotak Mahindra Bank Ltd. Yet long-term bond yields have barely reacted. The 10-year yield fell just 17 basis points last year, while yields on longer maturities have actually risen. Rates on one-year certificate of deposit rose by 19 basis points in December, the most since Oct. 2023.
Corporate bond borrowing costs reflect the same disconnect. State-run Small Industries Development Bank of India paid about 30 basis points more last week to issue a bond maturing in 2029 than it did two months earlier, when it sold a similar-maturing security at a 6.74% coupon.
Reserve Bank of India Sanjay Malhotra recently acknowledged the problem in an interview, saying monetary policy has “limitations” and that the transmission at the longer end of the yield curve remains a challenge. That weak pass-through is keeping funding costs high for both the government and companies, adding strain to an economy already hit by the highest US tariffs in Asia.
The pressure on the rupee has blunted the impact of monetary easing. The RBI’s foreign-exchange operations to support the rupee has drained liquidity from the banking system, weighing on demand for bonds. The RBI has sold about $45 billion in the foreign-exchange market since October, according to Kotak estimates.
Demand for bonds has also waned amid dwindling appetite from key investors such as insurers and pension funds, as insurers face slower sales of assured products and pension funds increase equity allocations following regulatory changes.
Higher bond-fund costs are now prompting firms to turn to bank loans, which are more closely aligned with the policy rate. Power Finance Corp., a frequent issuer, has shelved bond sales three times since November as borrowing costs climbed. The lender instead turned to bank loans, cutting funding costs by 50 to 70 basis points, Chairman and Managing Director Parminder Chopra said last week.
There may be some relief ahead. A potential trade deal with the US in the coming months could ease concerns about the growth outlook and reduce the need for large-scale bond purchases.
For now, investors say further action is likely. Given the current liquidity tightness and continued FX intervention by the RBI, incremental bond purchases are likely in the next few months, said Puneet Pal, head of fixed income at PGIM Asset in Mumbai. “The supply-demand dynamics remain unfavorable. We expect the curve to stay steep.”
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