Liquidity Over Levers: Why easing alone won’t cool Indian bond yields

Liquidity dynamics in India  
Even with successive RBI cuts, the 10-year benchmark yield has retraced earlier gains, reflecting tight system liquidity, global shocks, and cautious domestic demand. Analysts emphasize that durable injections and balance sheet changes are essential for sustained yield cooling, beyond incremental policy rate moves.  

Major takeaways  
• RBI’s MPC delivered 125 bps of rate cuts in 2025; 10-year yields remain elevated as liquidity stays tight  
• Market calls for ₹2-2.5 trillion durable infusion to improve transmission to the broader economy  
• December policy cut to 5.25% accompanied by measures aimed at injecting durable liquidity  
• Fed easing and renewed T-bill purchases can improve EM risk appetite and FPI debt flows, aiding rupee and local bond demand  

Impact on bond markets  
India’s yield curve now reflects macro credibility more than mechanical rate sensitivity. Durable liquidity, predictable government borrowing, and global easing should gradually anchor yields; without them, rate cuts alone risk a weak pass-through to lending rates and corporate borrowing costs.  

Sources: LiveMint, The Hindu BusinessLine, The New Indian Express, The Economic Times, Trust Group RBI Policy Review