Indian government bonds edged lower on Friday morning as traders maintained a cautious stance ahead of fresh debt supply and a heavy state borrowing calendar. The benchmark 10-year yield rose to 6.60% as of 10:35 a.m. IST, up from Thursday's close of 6.58%, reflecting market concerns about upcoming supply pressures.

Bond Market Performance

The bond market showed increased volatility on Friday as supply concerns intensified, with yields moving higher despite recent downward trends.

The yield movement comes despite a broader downward trend that saw yields fall 17 basis points throughout 2025, continuing to drift lower into the new year before Friday's uptick.

Major Debt Auction and State Supply Concerns

Market participants are particularly focused on Friday's substantial bond auction and the anticipated record state borrowing announcement.

Indian states are expected to announce their January-March borrowing calendar after market hours on Friday, with investors bracing for what could be a record quarterly supply of approximately ₹5 lakh crores. A private-bank trader noted that "the state debt auction calendar, followed by the Budget, will be the key triggers shaping risk appetite and the next move in bonds."

RBI Liquidity Measures and Market Dynamics

The Reserve Bank of India has been actively injecting liquidity through multiple measures to support market conditions.

The central bank has been conducting regular variable rate repo auctions since December 15 and is set to conduct open market purchases worth ₹1.50 lakh crores in January. The banking system cash was in a surplus of ₹23,865 crores as of Thursday, hovering around neutral levels after staying in deficit for most of December.

Interest Rate Environment and External Factors

Overnight index swap rates remained relatively stable in early trading, while external factors continue to influence domestic bond markets.

Rising U.S. Treasury yields are also weighing on Indian bonds, with the U.S. 10-year bond yield trading at 4.16% in Asian hours, up about 5 basis points in the last three sessions. This external pressure adds to domestic supply concerns as traders navigate the current market environment.

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.