RBI MPC: Will rate cut push 10-year G-Sec yields below 6.4% and charge up your bond portfolio?

The December monetary policy committee (MPC) meeting comes at an important juncture for India’s interest-rate cycle. The Reserve Bank of India has already signalled the start of easing this year, including a decisive 50 basis-point cut in June and earlier reductions that amount to 100 basis points across three policy reviews. The cumulative easing has brought down the policy rate to 5.5 percent. With inflation at a 13-year low and growth holding firm, the question is whether the RBI will press for further easing or pause to assess the durability of disinflation when it announces the rate decision on December 5. Even a modest policy move or a dovish tone from the RBI can reprice the yield curve. A further 25 basis-point cut or clear forward guidance can push the 10-year G-Sec yield below 6.4 percent and create significant mark-to-market gains for bondholders. Why disinflation is creating room for further easing October’s inflation numbers marked a clear inflection point for policy thinking. Headline CPI has fallen sharply and food inflation has moderated, as supply conditions normalised. With inflation comfortably inside the lower end of the central bank’s tolerance band of 2 to 6 percent and well below the 4 percent target, the disinflationary impulse gives the MPC the macroeconomic justification to consider another calibrated cut. Investors are particularly sensitive to the signal that such a cut would send. When inflation momentum is weak, the central bank can shift emphasis toward supporting growth without compromising price stability. That trade-off is precisely what markets are now asking the MPC to weigh. Global easing provides strategic cover Global central-bank dynamics matter for India. As advanced economies like the United States move toward easing, external interest-rate pressure on emerging-market yields and currencies tends to ease too. This global shift expands the RBI’s strategic room to cut without triggering large capital outflows or undue currency volatility. Market participants view a potential December cut as a finely tuned step rather than a risky pivot. If the US Fed and peers ease, a 25-basis-point cut by the RBI would sit comfortably within the new global context and it may be the final reduction in the current cycle. Why the governor's commentary moved markets RBI governor Sanjay Malhotra's recent remarks, which suggested there is scope to ease, have already affected market pricing. Forward guidance can be as important as the policy action itself because bond markets are forward-looking. When the central bank signals a dovish tilt, the long end of the curve usually reprices, putting immediate downward pressure on yields. This explains why even a small change in language at the December meeting could precipitate a meaningful rally in G-Secs, especially if the MPC couples a cut with clear communication about the path ahead. Also read | A bet on urban India: How municipal bonds are slowly gaining traction Mechanics: how a rate cut lowers long-term yields A repo rate cut reduces banks’ funding costs and filters through to lending and issuance rates. Fresh borrowing at lower rates makes existing bonds with higher coupons more attractive. As demand for those bonds rises, their prices increase and yields fall. For the 10-year G-Sec, which anchors many other rates in the economy, this mechanism can lead to swift price appreciation. If the MPC signals further easing, market consensus could tighten the term premium, pushing the benchmark yield below 6.4 percent. The case for waiting: growth and market signals There is, however, a compelling case for the RBI to maintain the current stance. The bond market has shown ambivalence, with 10-year yields moving back above 6.5 percent even after Malhotra signalled a possible cut, suggesting bond traders are not anticipating a rate cut and thus are not pricing it in. Recent macro data underlines India’s robust growth potential. Q2 FY26 GDP growth came in at 8.2 percent and corporate earnings have broadly improved, pointing to healthy demand conditions. This convergence of low inflation and robust growth is the classic goldilocks scenario. In such a phase, central banks may prefer to delay or even shelve additional easing to avoid disturbing the growth and inflation equilibrium. A continued pause allows the MPC to validate the data before committing further. Also read | Elon Musk predicts AI evolution will force money as concept to disappear, working to be optional in less than 20 years Portfolio implications for retail investors For investors, the two scenarios imply different near-term outcomes. If the RBI cuts again or signals a clear easing path, existing government and investment-grade corporate bonds are likely to rally. This would favour investors with long-duration holdings who can capture capital gains in addition to coupon income. For laddered portfolios, the immediate flattening of the yield curve would boost mark-to-market returns while preserving predictable cash flows from shorter maturities. If the RBI holds, yields should remain in the current neighbourhood and provide attractive coupons for investors seeking steady income. While capital appreciation would be limited, the stability would suit conservative savers who prioritise predictable returns. Across both cases, diversification across maturities and credit quality remains the best defence. Bonds are not merely safe-harbour assets. When rate cycles shift, they can provide both income and capital gains for disciplined investors. The bottom line The December meeting could mark the next inflection in India’s easing cycle. Having already reduced rates this year to 5.5 percent, the RBI now faces a binary but nuanced choice: ease further to lock in a growth-friendly stance or wait to confirm the sustainability of disinflation. Either outcome will carry clear signals for the yield curve and bond portfolios. For investors, staying informed and maintaining a well-structured bond allocation will be the most effective way to navigate whatever path the MPC chooses. The writer is co-founder Jiraaf, a bond investment platform.