Indian government bonds are poised for a cautious start to 2026 as market participants focus on upcoming debt supply and state borrowing announcements. The benchmark 10-year yield closed at 6.58% on Wednesday and is expected to trade within a narrow 6.56% to 6.60% range as traders assess demand-supply dynamics in the near term.

Bond Performance Overview

The Indian bond market concluded 2025 with mixed signals, showing resilience despite supply pressures. Key performance metrics highlight the market's trajectory:

Upcoming Debt Supply Schedule

The government's borrowing calendar presents significant supply pressures that market participants are closely monitoring. New Delhi has scheduled substantial bond issuances that will test market appetite:

Interest Rate Swap Market

India's overnight index swap rates are expected to remain range-bound following their strong performance in 2025. The swap market demonstrated significant easing across various tenors:

The swap rates posted their third consecutive yearly decline and recorded the sharpest fall in five years during 2025, reflecting the accommodative monetary policy environment.

Market Outlook and Key Factors

Despite supportive measures including record central bank debt purchases, liquidity infusion, and significant rate cuts, questions remain about market appetite for increased debt supply. A private bank trader noted that demand-supply dynamics, which dominated the second half of 2025, will continue to influence market movements. Large moves in benchmark papers are unlikely until after the upcoming auction, with traders focusing on the state borrowing calendar as a crucial indicator for near-term yield direction.

The Reserve Bank of India is scheduled to conduct an overnight variable rate repo operation for ₹1.00 lakh crores, providing additional liquidity support to the market as it navigates the supply-heavy environment in early 2026.

Indian government bonds ended largely unchanged Wednesday, with the benchmark 10-year yield settling at 6.61% compared to the previous session's close of 6.61%. The flat performance followed disappointment over the Reserve Bank of India's selection of illiquid papers for next week's debt purchase operations, bucking market expectations for inclusion of liquid benchmark securities.

RBI's Debt Purchase Strategy Disappoints Markets

The central bank continued its pattern of selecting illiquid papers for bond purchases, avoiding the former benchmark bonds and other liquid securities that traders had hoped would be included in market operations. This approach has kept market sentiment tepid despite the RBI's aggressive bond-buying program.

The Reserve Bank of India purchased ₹500 billion of bonds earlier this week and is scheduled to bid for twice that amount through January 22. However, the focus on illiquid papers has failed to address broader market liquidity concerns.

Supply Concerns Persist Despite Record Purchases

Despite the RBI's record ₹4.70 trillion bond purchases this financial year, concerns about hefty supply continue to weigh on market sentiment. State and central governments are set to raise more than ₹8 trillion through March end, creating ongoing supply-demand imbalances.

"Going ahead, we expect the excess supply concerns to continue unless we witness the revival in demand by pensions, insurance and banks," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. State-run banks' preference for state bonds over central government securities has also contributed to elevated yields.

Bloomberg Index Inclusion Awaited

Traders are closely monitoring developments regarding the potential inclusion of Indian bonds in the Bloomberg Global Aggregate Index. Goldman Sachs analysts estimate the index weight could be 0.70% with potential inflows of $10-20 billion post-inclusion, which could provide significant demand support.

Swap Rates Show Easing Pressure

India's overnight index swap rates eased Wednesday, led by receiving pressure in longer-duration swaps. The curve flattened as longer-term rates declined more significantly than shorter tenors.