The benchmark 10-year Indian government bond yield jumped 24 basis points to 6.62% in August, including a 22-basis-point rise across seven sessions as institutional buying evaporated and dealers described a buyers strike in the secondary market. Traders, primary dealers and economists said the selloff has hit long-term investors, large banks and corporate issuers, forced some fundraising plans to be shelved and effectively wiped out around 100 basis points of rate-cut gains delivered since February. At a meeting on Tuesday with the Reserve Bank of India, market participants warned yields had breached technical levels and threatened monetary transmission, and they pressed the central bank for measures to restore calm. RBI officials gave no clear signal they would launch large-scale purchases, leaving the near-term arithmetic focused on 2.6 trillion rupees of bonds due to mature this fiscal year and the roughly 750 billion rupees of that stock already on the RBI's books.
The key read is simple. A sudden absence of institutional buyers turned a routine sell phase into a market event. The 10-year yield climbed to 6.62% in August, with 22 basis points of that move occurring over seven trading sessions, traders said. That spike has wiped out the gains from roughly 100 basis points of policy rate cuts the RBI made since February, delaying how soon cheaper policy rates will ease credit conditions.
Why yields blew past 6.6%
Participants who spoke at the meeting pointed to a cluster of proximate drivers. Fiscal uncertainty after the government announced plans for tax cuts has dented appetite for long-duration paper. Pension funds and insurers have rotated into equities, leaving fewer steady buyers for government bonds. And large banks, already nursing mark-to-market losses, trimmed purchases to avoid crystallising losses on their books, traders said.
Market structure amplified those pressures. Restrictions on banks' use of held-to-maturity portfolios have reduced their ability to lock in profits and pushed them into more active trading, participants said. At the same time, both central and state governments have increased long-term borrowing, worsening the mismatch between supply and demand in the market. Bonds worth over 2.6 trillion rupees are due to mature in the current fiscal year, and the RBI holds about 750 billion rupees of that stock, figures that shape the near-term supply backdrop.
The selloff also had direct consequences for corporate funding. Firms that planned to raise cash, including HUDCO and Bajaj Finance, withdrew their deals amid the spike in yields, traders told the meeting. That underlines the transmission risk: higher sovereign yields push up borrowing costs across the economy and can prompt issuers to defer or cancel planned issuance.
What dealers asked the RBI
Primary dealers and traders laid out a menu of requests to the central bank at Tuesday's session. Open-market purchases of government bonds were the most commonly cited demand.
Several traders argued that even token RBI buying would shift sentiment and stabilise yields by signalling backstop demand.
Some participants proposed operational fixes to primary auction mechanics. They urged a return from the multiple-price bidding method adopted in April 2024 to uniform pricing, which they said would limit immediate mark-to-market losses for successful bidders and encourage greater participation. One trader told the meeting that uniform pricing could "calm down nerves and give some comfort to investors that their investment won't move into immediate mark-to-market loss," according to attendees.
Other suggestions reflected balance-sheet thinking. Traders and economists suggested the RBI could offer swaps of maturing short-dated paper for 5-10 year bonds to help banks manage mark-to-market strain. A subset of participants at the meeting said they saw scope for the RBI to buy more than 1.5 trillion rupees of bonds, though that figure was reported only by those attendees and not confirmed by the central bank.
Voices in the market were stark. VRC Reddy, treasury head at Karur Vysya Bank, said investors had been sidelined and short sellers were moving in as key technical levels broke.
A. Prasanna, economist at ICICI Securities Primary Dealership, warned the move could weigh on corporate bond borrowing, as higher sovereign yields raise the cost and risk of issuance.
Economists at the meeting linked the surge in yields to the erosion of policy easing. The rise since the RBI's policy decision on August 6 has undone much of the transmission from cuts earlier in the year, they said, lengthening the interval before lower policy rates and liquidity injections fully feed through to lending rates and credit growth.
The RBI, for its part, listened without promising large-scale intervention. Officials didn't indicate they would start aggressive purchases at once, leaving market participants to weigh whether verbal reassurance and technical tweaks will be enough to steady a market that has already priced a sharp re-evaluation of long-term rates.
Related Articles
- India WPI jumps 8.3% as energy costs surge
- Manipal Hospitals to Market $1bn IPO, Biggest in Sector
- ECB holds deposit rate at 2.0 per cent as oil risks could prompt hikes
The near-term arithmetic is simple: bonds worth 2.6 trillion rupees mature this fiscal year, about 750 billion rupees of which the RBI already holds. Whether the central bank converts that stock into active purchases or other operational support will determine if dealers' requests translate into lower yields or if the buyers' strike persists.
This article was created with AI assistance.
