Whalesbook
Bond Market Pressure
India's bond market has faced increased selling pressure since the West Asia conflict intensified in late February. Banks, primary dealers, foreign investors, and mutual funds have sold bonds, pushing yields higher, especially for maturities up to the benchmark 10-year. This raises borrowing costs for the government and corporations.
RBI Steps In
The 'others' category, including insurance firms and pension funds alongside the RBI, became the main buyer, absorbing about a trillion rupees in bonds. While pension and insurance funds usually buy long-term bonds, RBI appears to be the driving force behind recent large purchases. These moves are closely tied to the central bank's actions in the forex market, aimed at stabilizing the rupee amid capital outflows driven by global war fears.
Record Absorption
Data shows the RBI bought ₹8.8 trillion worth of government bonds in fiscal year 2025-26 through auctions and the secondary market. This volume exceeds even the bank's purchases during the pandemic's peak. As a result, the RBI absorbed over 60% of the government's total market borrowing for FY26, a figure far beyond typical levels.
Distorted Reality
This aggressive intervention, while addressing immediate liquidity and currency issues, has caused a major distortion. Market yields are no longer accurately reflecting the country's fiscal position, inflation outlook, or growth prospects. The central bank is effectively setting yields, masking true economic signals and creating problems for market participants and economic planning. Analysts believe the RBI will struggle to exit this role, especially as the West Asia conflict continues to cloud the economic outlook and require liquidity support.