Government Securities Witness Yield Compression Amid Fiscal Consolidation and FPI Inflows
The cut-off yield range on 10-year benchmark government bonds in FY25 has remained the lowest in the past three fiscal years, reflecting stable market conditions, strong foreign inflows, and expectations of monetary easing. This comes as the government completes its borrowing program for the fiscal year, setting the stage for a favorable bond market environment.
According to Reserve Bank of India (RBI) data, the cut-off yield range for FY25 stood at 6.7270-7.1889 percent, the lowest since FY22, when yields were in the range of 5.9937-6.78 percent.
Key Highlights of the Bond Market in FY25:
- Lowest yield range in three years, reflecting strong demand for government securities.
- Foreign portfolio investment (FPI) inflows surged, driven by India’s inclusion in global bond indices.
- Expectations of monetary policy easing helped compress yields despite no immediate rate cut.
- Government’s fiscal consolidation efforts boosted investor confidence.
- RBI delivered a 25-basis-point rate cut in February 2025, reinforcing lower yields.
Tight Yield Range Driven by Foreign Investments and Fiscal Policy
According to Venkatakrishnan Srinivasan, Founder and Managing Partner of Rockfort Fincap LLP, FY25 has seen an unusually tight range in 10-year benchmark bond yields, driven by multiple factors, including:
- Sustained FPI inflows, following India’s inclusion in JP Morgan Government Bond Index-Emerging Markets and Bloomberg Emerging Market (EM) Local Currency Index.
- Expectations of monetary policy easing, leading to a strong demand for bonds.
- Fiscal consolidation efforts, with the government targeting a lower fiscal deficit.
- Well-balanced supply-demand dynamics in the bond market.
- Robust institutional participation, reinforcing market stability.
“These factors have led to a sharp compression in yields, with the 10-year bond yield dropping over 100 basis points despite the absence of a rate cut,” Srinivasan added.
Historical Trends in Bond Yields and Policy Rates
In FY22, the RBI had maintained a lower repo rate of 4.00 percent to support the economy post-pandemic. As inflation surged, the central bank gradually increased rates, pushing yields higher in subsequent years.
The next two financial years (FY23 and FY24) saw higher yields on government securities, primarily due to:
- Rising inflationary pressures.
- Tighter monetary policy, with the RBI maintaining a higher repo rate.
- Extended period of elevated interest rates to control inflation.
However, FY25 witnessed a reversal in this trend, with bond yields stabilizing at lower levels due to strong foreign inflows and improved economic fundamentals.
Foreign Inflows Fuel Demand for Indian Bonds
A key driver of lower bond yields in FY25 has been the increased participation of foreign investors. India’s inclusion in global bond indices has attracted substantial foreign inflows, with Rs 1.04 lakh crore pouring into Indian bonds since the announcement.
According to Umesh Kumar Tulsyan, Managing Director of Sovereign Global Markets, the RBI’s pause on rate hikes since early 2023 has played a significant role in stabilizing the bond market. He highlighted that:
- Inflation has moderated significantly, with the RBI’s FY25 projection at 4.8 percent, down from 6.7 percent in FY23.
- Government’s fiscal consolidation efforts, including a revised fiscal deficit target of 4.8 percent of GDP for FY25, have bolstered investor confidence.
- **The government aims to bring the fiscal deficit down
