Topic 2: DEBT MARKET : LIGHTING UP

In August 2025, the Indian debt market presented a nuanced picture of resilience balanced against pressure, as yields across maturities moved upward in response to fiscal and demand concerns, yet remained broadly stable due to steady foreign inflows and supportive domestic liquidity measures, making the month a study in contrasts between global headwinds and local stabilizers. The benchmark 10-year government bond yield, which had hovered in a narrow range of 6.55% to 6.56% earlier in the month, ultimately surged by nearly 24 basis points to end closer to 6.62%, while the 30-year government bond yield climbed even more dramatically—up 56 basis points since April—to around 7.32% by late August, underscoring the weakness in long-duration demand and reflecting fears of mounting fiscal pressures. This rise was compounded by muted appetite from traditional institutional investors such as banks, insurers, and pension funds, whose conservative stance left demand gaps and created what analysts described as a “buyer’s strike,” particularly in longer-term securities, amplifying the supply-driven rise in yields. Investors grew uneasy following Modi’s Independence Day remarks on restructuring indirect tax slabs, which were interpreted as potentially reducing government revenue and necessitating higher borrowing; the anticipation of larger central and state debt auctions crowded the supply calendar and pushed yields higher, marking the sharpest jump in over a year. Despite this, the Reserve Bank of India (RBI) maintained a cautious but accommodative monetary stance, holding the repo rate at 5.5% and ensuring system liquidity through tools like Variable Rate Reverse Repo (VRR) and Variable Rate Repo Refunding (VRRR) auctions, while keeping core liquidity at over ₹5 trillion and surplus liquidity above ₹2.8 trillion. These interventions kept short-term money market rates steady, ensured smooth transmission of earlier rate cuts, and supported investor demand for government securities, preventing yields from spiking further. Global dynamics, however, weighed heavily: persistent US inflation delayed expectations of Federal Reserve rate cuts, keeping global interest rates elevated and narrowing the India-US yield spread to multi-decade lows, which dampened the relative appeal of Indian debt for foreign portfolio investors (FPIs). At the same time, geopolitical tensions—including the US imposition of steep 50% tariffs on Indian exports on August 27 and continuing uncertainty around India’s oil trade with Russia—added risk premiums, pressuring yields upward.Yet, despite these challenges, FPIs displayed cautious optimism in the debt segment, even as they exited equities in large numbers; net inflows into debt stood at around ₹6,207 crore in August, highlighting a relative “flight to safety” within fixed income and the attractiveness of Indian bonds given their inclusion in global indices and still-compelling yields compared to developed market peers. The biggest relief came mid-month when S&P Global upgraded India’s sovereign rating from BBB- to BBB, citing fiscal prudence and macroeconomic strength, a move that briefly softened yields and boosted confidence in both sovereign and corporate issuances, particularly infrastructure and green bonds that were increasingly coming to market. Still, cautious sentiment lingered, with markets widening the spread between the 10-year yield and the repo rate to nearly 100 basis points, effectively signalling scepticism about imminent rate cuts despite July CPI inflation being as low as 1.55%. Domestic credit conditions, strong GDP growth projections near 6.5%, and robust fiscal discipline efforts provided an anchor, but the combination of institutional reticence, heavy government borrowing supply, and global rate pressures meant yields carried a modest upward bias throughout the month. In sum, the Indian debt market in August 2025 reflected a delicate balance: on one hand, it was buoyed by RBI’s liquidity support, steady foreign inflows, and a sovereign rating upgrade that reinforced investor confidence; on the other, it faced upward pressure from fiscal concerns, weak demand for long-dated paper, heavy supply expectations, and global uncertainty tied to US tariffs and elevated international yields. The net outcome was a market that avoided disorderly sell-offs and displayed resilience, yet clearly signalled that structural challenges remain, with yields likely to stay range-bound but tilted upward in the near term as global volatility persists, government borrowing continues, and domestic institutions weigh their exposure more conservatively than in previous cycles.