Recently, the Reserve Bank of India (RBI) cancelled the auction for ₹11,000 crore worth of 7-year government bonds (6.32% GS 2032) after bidders demanded a yield of around 6.6%—a level the central bank deemed too high. Accepting such bids could have caused a wider rise in yields, so the RBI’s decision expressed its unease with high borrowing costs in the current situation.

"Currently, India’s bond markets are under pressure. This can be attributed mainly to higher-than-expected economic growth, rising government borrowing needs, and declining institutional demand for sovereign debt," said Tushar Sharma, Co-founder of bondbay.

The RBI auctioned a 7-year government bond (a “G-sec”), but rejected bids because market yields were above the issuer's willingness to pay. This implies that for that tenor (7 years), investors believe they require a higher return (i.e., a higher yield) given prevailing interest-rate, inflation, or risk expectations.

When yields are demanded higher, the government (via the RBI) may not accept the bids if that would entail too high a cost of borrowing or mismatches with its desired yield curve. So a rejected auction is a signal of market stress (or at least a yield re-pricing).

For investors, the central bank’s move highlights two key realities: Interest rates are likely to stay firm and market appetite for medium-duration bonds is softening.

Investors should remember three major points while investing:

1. Duration Risk: Avoid long-term bonds until yields stabilise. Rising yields erode prices, especially in longer-tenor instruments. Investing in short- and medium-term maturities (1-5 years) is preferable, as this duration class is the least volatile.

2. Liquidity & Timing: Market yields are directly and strongly influenced by the government’s borrowing and the RBI's liquidity stance. Investors should keep money in hand to re-enter when yields rise further.

3. Alternative opportunities: This includes Short-Term G-Secs and T-Bills. "In the current volatile and ambiguous environment, parking funds in Short-Term G-Secs helps preserve safety," says Sharma. Second, High-Grade Corporate Bonds/PSU Debt. Sharma says, due to widening credit spreads, investing in high-quality corporate and PSU bonds is preferred, as they offer a 50-100 bps premium over G-Secs. Third, floating-rate bonds. Investing in floating-rate bonds protects against inflation as interest rates rise. Fourth, Target Maturity Funds (TMFs). “Blend predictability of maturity with diversification and liquidity,” adds Sharma.

"For carry-seekers with state credit appetite, the 10-year SDL/G-Sec spread has widened to ~100–106 bps (a 5.5-year high). That implies ~7.6% on 10-year SDLs when the 10-year G-Sec is ~6.53%—a compelling pickup with SLR eligibility and improving fiscal optics. Do size exposures prudently and stick to liquid states," said Karthick Jonagadla, investment manager on smallcase and Founder and CEO of Quantace Research.