India’s bond market is likely to remain under pressure in the near term after witnessing sharp volatility in the second half of FY26, with yields expected to stay elevated amid persistent global uncertainties and domestic supply concerns, according to a report by Bank of Baroda.

Dipanwita Mazumdar, Economist, BoB expects India’s 10-year government bond yield to trade in the 6.9-7.10% range in the near term, with an upward bias, unless the ongoing war situation de-escalates.

She noted that the 10-year yield has remained volatile through FY26, starting at around 6.40% in April 2025, moving largely range-bound in the initial months, and then inching higher in the second half. Yields rose to around 6.65% in January 2026, further to 6.70% in February, and 6.75% by March, reflecting sustained upward pressure driven by global cues, rising crude oil prices, inflation concerns, and currency weakness.

The first half of the fiscal saw a softening bias, supported by favourable inflation, an easing monetary policy cycle, and liquidity measures by the Reserve Bank of India (RBI). However, yields turned sticky later due to concerns around excess supply of government securities.

West Asia conflict amplifies pressure

The report highlighted that the ongoing West Asia conflict has intensified pressure on yields, given India’s heavy reliance on oil imports. “The reverberation on India’s yield has been significant… fiscal and inflationary concerns could not take a backseat,” Mazumdar said.

She added that stickiness in yields is likely to persist unless geopolitical tensions ease.

She also pointed out that overnight indexed swap (OIS) rates indices the possibility of a rate hike ahead, although no policy action is expected in April, as the RBI is likely to adopt a data-dependent approach in a volatile global environment.

Explaining the FY26 trajectory, Mazumdar said yields initially softened on the back of front-loaded rate cuts and liquidity infusion by the RBI, but began rising from December 2025 amid escalating geopolitical tensions, with volatility spilling across asset classes.

On a comparative basis, India’s 10-year yield rose 45 basis points in FY26, lower than the increase seen in South Korea (111 bps) and Japan (86 bps). For India and South Korea, the rise was largely linked to war-led energy price pressures, while Japan’s increase followed a shift away from ultra-low rates.

FPI flows remain volatile

Foreign portfolio investor (FPI) flows into debt remained highly volatile through the year. FPIs started with an outflow of $2.8 billion in April, followed by inflows of $1.4 billion in May, before turning erratic with alternating inflows and outflows through the year. October saw stronger inflows of $2.1 billion, but sentiment weakened toward year-end, with outflows in December and March.

Mazumdar cautioned that continued geopolitical uncertainty could keep debt flows volatile, adding to upward pressure on yields. She also noted that while oil price spikes during geopolitical crises, their impact on yields is largely indirect, transmitted through inflation rather than a direct correlation.

Borrowing, liquidity in focus

Domestically, borrowing dynamics remain finely balanced, with the Centre’s H1FY27 borrowing pegged at ₹8.2 lakh crore. A calibrated issuance strategy, with lower reliance on ultra-long securities (above 30 years), is expected to limit pressure on the long end of the yield curve. However, average borrowing costs are seen inching up to 7.10%, the report noted.

Liquidity conditions have also played a key role. While stress was visible in H2FY26, RBI interventions through LAF, open market operations, and swaps helped cap yields. The central bank conducted record OMO purchases of ₹8.8 lakh crore to support durable liquidity. System liquidity currently stands at around 0.9% of net demand and time liabilities (NDTL), with no immediate pressure, though risks remain if credit growth stays strong and the rupee weakens.

Outlook

Looking ahead, Mazumdar said the yield curve has steepened compared to March 2025, reflecting elevated fiscal and inflation concerns. However, with inflation below the RBI’s target and growth on a stable footing, the central bank is likely to remain in a wait-and-watch mode, with a potentially hawkish undertone.

She expects yields to remain elevated in the near term, but noted that any resolution of the West Asia conflict could trigger a correction, supported by comfortable liquidity conditions and prudent government borrowing management.

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