Why India’s Rate Cuts Didn’t Pull Down Long Yields in 2025

According to FTSE Russell’s December 2025 note on Indian government bonds, India’s yields did not fall as much as those in other Asia-Pacific markets, even as inflation decelerated sharply. The reason is the story most investors missed: in 2025, the front end of the curve listened to the RBI, but the long end priced a different set of risks.

Inflation fell, but real policy stayed exceptionally tight

India’s CPI inflation fell sharply, and official projections for FY26 and FY27 sat at 4.5% and 4.0%. On the surface, that should have created room for a sustained easing cycle. This disinflation pushed the real policy rate above 5%, which it calls exceptionally tight.

Many investors treated 2025 as “rates are coming down.” The reality was closer to “rates came down, but policy was still tight in real terms.”

FTSE Russell notes this creates scope for further rate cuts in 2025–26 to bring policy closer to neutral, given inflation is below the RBI’s 4% target level.

The RBI cut 100 bps and added liquidity

In 2025, the RBI cut the repo by 100 basis points, from 6.5% to 5.5%, shifted its stance to “accommodative,” and supported liquidity through tools such as CRR cuts and OMOs.

That should have been enough to drag the curve lower across maturities. Instead, the monetary transmission was less effective, with yields staying sticky, especially at the long end. Longer maturities continued to reflect supply concerns and global risk sentiment, making policy cuts less reliable as a driver of long-end yields in 2025.

Investors often assume central banks control the whole curve. In 2025, the long end reminded everyone that it also answers to supply, fiscal credibility, and global risk conditions.

Fiscal and supply anxiety became long-end gravity

FTSE Russell points out that fiscal dynamics were a major focus in 2025. While the deficit remained elevated, the government stayed on a consolidation path. Borrowing strategy also shifted, with reduced ultra-long supply and increased issuance in the 3–15 year segment.

A specific catalyst hit confidence in the back half: a GST reduction in September 2025. After this change, GST revenue growth became mixed and raised concerns about fiscal headroom and whether consolidation would remain sustainable. Long-dated bond performance was weighed down in H2 2025 by the risk of higher issuance after the GST change.

For investors, this is the clean takeaway: in 2025, the market treated fiscal credibility as a live variable again, not a background assumption.

Foreign flows slowed, but a structural buyer showed up

Foreign portfolio inflows softened in 2025 due to unresolved tariff negotiations with the US and general global risk aversion. That matters because, even as domestic institutions anchor the market, foreign flows still affect the marginal clearing price and the term premium.

But there was an important structural development in the form of India’s inclusion in global bond indices. Inclusion in the FTSE Russell Emerging Markets Government Bond Index from September 2025 provided a structural boost to demand for Indian government bonds. Index inclusion is plumbing. It creates benchmark-driven demand that is typically less jumpy than opportunistic flows, and it changes who the marginal buyer is over time. A skeptical investor should still keep perspective: structural demand helps, but it doesn’t erase fiscal and supply concerns.

The curve steepened and the belly started looking attractive again

FTSE Russell highlighted that the yield curve has steepened:

• 7–10 year bonds offered about 80 bps more yield than 1–3 year bonds.
• 30-year bonds offered about 130 bps more than 1–3 year bonds.

It notes this steepness resembles pre-COVID levels and reflects mean reversion in term premia. But the relative-value point that matters for global allocators is that India’s 7–10 year yields exceed those of APAC peers despite lower Indian inflation.

Put these together and you get a simple framing: in 2025, the curve paid investors again for going out in maturity, especially in the belly, even as the long end remained sensitive to supply and fiscal risk.

FTSE Russell notes Indian government bonds generated positive year-to-date returns despite global volatility and reduced foreign inflows. It attributes support to an August credit rating upgrade and the ongoing consolidation effort.

Strong growth complicated the easing narrative

One more factor kept the market from pricing an endless cutting cycle, and that was growth. India’s growth forecasts were revised higher for 2025–26, with the IMF revising India from 6.4% to 6.6%, following 7.8% annualised growth in April–June 2025. This matters because a market that believes growth is resilient won’t rush to price deep cuts, especially when fiscal and supply questions are active.

What investors should take into 2026

First, disinflation is supportive but not sufficient. Inflation projections are constructive, but real rates remained exceptionally tight, and the long end cared about other risks.

Second, RBI cuts don’t automatically deliver a long-duration rally. Transmission was less effective, especially at longer maturities.

Third, fiscal and supply credibility are now front-page variables for the curve. The GST change and the resulting concerns about fiscal headroom weighed on longer bonds in H2 2025.

Fourth, index inclusion is the structural story. FTSE EMGBI inclusion from September 2025 may provide steady demand and improve market depth over time.

Fifth, the curve is paying you again, especially in the belly. The steepness and India’s relative yields versus APAC peers are not trivial.

India’s bond market is increasingly trading like a mature market: policy matters, but so do supply, fiscal credibility, global flows, and index-driven demand. That’s the story that will determine whether 2026 is another year of sticky long yields.

Brand Manager

Aayushi Thakur

Frequently Asked Questions

Q: Why did India’s long-term bond yields stay sticky in 2025 even after RBI cuts?

A: FTSE Russell says policy transmission was less effective, especially at the long end, with longer maturities reflecting supply concerns and global risk sentiment.

Q: What is the structural change in India’s bond market highlighted in the report?

A: India’s inclusion in the FTSE Russell EMGBI from September 2025 may provide a structural boost to demand for Indian government bonds.

Q: What part of the curve looks attractive?

A: The report highlights a steep curve where 7–10 year bonds offer about 80 bps more yield than 1–3 year bonds, and India’s 7–10 year yields exceed APAC peers despite lower inflation.

Q: Why did the September 2025 GST change matter for bonds?

A: It raised questions on fiscal headroom and potential issuance, which weighed on long-dated bonds in H2 2025.

Q: If index inclusion supports demand, why didn’t it drive a long-duration rally?

A: Because long maturities were still pricing supply, fiscal credibility, and global risk conditions more than policy cuts.

Sources

https://www.lseg.com/content/dam/ftse-russell/en_us/documents/research/ftse-indian-government-bond-market.pdf