India’s 10-Year Bond Yield Falls to 6.35% Amid Low Inflation and Dovish RBI Moves

26 June

The yield on India’s 10-year government bond (G-Sec) declined to 6.35% on Wednesday, reversing part of its brief climb to 6.4% on June 23rd. The retreat reflects shifting investor sentiment as geopolitical risks eased, inflation softened to multiyear lows, and the Reserve Bank of India (RBI) delivered an unexpectedly aggressive round of monetary and liquidity support in response to tightening domestic conditions.

Oil Risk Premium Fades as Tanker Flows Continue Uninterrupted

The recent spike in yields earlier this week was partly driven by fears that a potential escalation in the Israel–Iran conflict could disrupt crude flows from the Persian Gulf, which supplies nearly 85% of India’s imported oil (Ministry of Petroleum and Natural Gas, 2025). However, those concerns have quickly faded. The US-brokered ceasefire between Tehran and Tel Aviv appears to be holding, and shipping data confirms steady volumes of oil tankers traversing the Indian Ocean, mitigating fears of a supply shock.

With oil prices pulling back sharply—WTI fell nearly 13% over two sessions before stabilizing at $65—Indian refiners have benefited from easing input costs, lowering the immediate threat of imported inflation. This relief in global oil benchmarks, a primary determinant of India’s inflation volatility, has bolstered sentiment in both debt and equity markets.

Inflation Falls to 2.82%: Lowest Since 2018

Further supporting the bond rally is India’s benign inflation trajectory. Headline CPI inflation fell more than expected to 2.82% in May, significantly below the RBI’s 4% midpoint target and marking the lowest level in over six years. The core inflation rate (excluding food and fuel) also declined to 3.1%, reinforcing the narrative of widespread disinflation across categories.

This low-inflation environment has given the RBI ample policy space to shift into a more accommodative stance. With inflationary risks from food, fuel, and FX movements all subsiding simultaneously, the bond market has reacted by pushing yields lower in anticipation of continued dovish policy.

RBI’s Surprise Rate Cut and Liquidity Injections

In a surprise move at its June monetary policy meeting, the RBI cut the repo rate by 50 basis points to 5.5%, defying market consensus which had expected only a 25 basis point reduction. The central bank explicitly cited “slack in demand recovery” and “anchored inflation expectations” as key justifications.

To support its easing campaign, the RBI also launched targeted liquidity injections into the banking system. This move follows the central bank’s prior interventions in currency markets to support the rupee, which had come under pressure earlier in June due to capital outflows and dollar strength. These interventions drained liquidity, prompting temporary spikes in overnight rates and tightening credit conditions across the interbank system.

Responding swiftly, the RBI infused more than INR 500 billion (~USD 6 billion) through open market operations (OMOs), repo auctions, and standing deposit facility adjustments. These measures aim to stabilize short-term money markets, enhance credit flow to the real economy, and reinforce the broader disinflationary narrative.

Bond Market Implications: Sustained Rally or Temporary Relief?

The moderation in India’s 10-year yield signals renewed confidence in macroeconomic stability, with investors increasingly betting on a prolonged dovish cycle from the RBI. However, several medium-term uncertainties remain:

Monsoon Dependence: Food inflation could rebound if the southwest monsoon underperforms, especially given the structural sensitivity of Indian CPI to cereal and vegetable prices.
Fiscal Dynamics: While the central government’s fiscal deficit remains within target (5.1% of GDP), upcoming state elections may trigger populist spending, potentially raising bond issuance needs in H2 2025.
External Balance: Although crude imports are currently stable, any renewed dollar strength or geopolitical flare-up could reverse capital flows, putting upward pressure on bond yields and the rupee.

For now, the flattening yield curve suggests markets expect at least one more rate cut by the RBI before the end of 2025, especially if inflation remains below 4%. Foreign investors have also resumed modest buying of Indian debt instruments after a brief pause, encouraged by the policy clarity and improving risk sentiment.

Key Takeaways:

India’s 10-year G-Sec yield eased to 6.35%, down from 6.4% earlier in the week.
Ceasefire in the Middle East calmed oil markets, ensuring uninterrupted crude supplies to India.
May inflation fell to 2.82%, a six-year low, supporting the RBI’s 50bps rate cut to 5.5%.
RBI launched INR 500 billion in liquidity operations to offset FX intervention-driven tightening.
Markets now price in further easing, with the yield curve flattening and real rates rising.

Sources:

Reserve Bank of India (2025). Monetary Policy Statement – June 2025.
Ministry of Petroleum and Natural Gas (2025). Crude Import Dependency Report.
Indian Ministry of Statistics and Programme Implementation (2025). CPI Inflation Release – May.
Bloomberg Terminal Data (Accessed June 25, 2025).
Reuters (2025). India Bonds Gain as Inflation Eases and RBI Cuts Rates.

Shruti Kant