RBI’s dovish tilt softens yields, but long-end pressures persist: October 2025 fixed income outlook

Synopsis Indian bond yields softened in October. The Reserve Bank of India's dovish stance lowered expectations for interest rates. Inflation dropped significantly, boosting sentiment. However, the longer end of the bond market faced pressure. Foreign investors showed strong interest in Indian debt. The RBI is expected to conduct Open Market Operations to manage liquidity and stabilize yields. India’s bond market witnessed a nuanced shift in October, with yields easing across most maturities even as the longer end of the curve remained under pressure. According to Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, the Reserve Bank of India’s unexpectedly dovish tone at the October 1 MPC meeting played a key role in driving yields lower, despite the central bank keeping policy rates unchanged. RBI’s Policy Signals Trigger Yield Softening As highlighted by Puneet Pal, the RBI lowered its FY26 inflation forecast sharply to 2.6%—a full 100 bps below its June projection—while simultaneously upgrading its GDP growth outlook to 6.8% from 6.5%. The combination of benign inflation expectations and improved growth sentiment supported the decline in yields. While the monetary policy stance officially remained “Neutral,” two MPC members—Dr. Nagesh Kumar and Prof. Ram Singh—favored shifting to an “Accommodative” stance, adding to the bond market’s optimism. RBI’s dovish tilt softens yields, but long-end pressures persist: October 2025 fixed income outlook Indian bond yields softened in October. The Reserve Bank of India's dovish stance lowered expectations for interest rates. Inflation dropped significantly, boosting sentiment. However, the longer end of the bond market faced pressure. Foreign investors showed strong interest in Indian debt. The RBI is expected to conduct Open Market Operations to manage liquidity and stabilize yields. Rupee Weakness Draws Rare RBI Commentary In an unusual move, the RBI governor also commented on the rupee’s weakness, noting episodes of depreciation and volatility. As explained by Puneet Pal, this prompted RBI to intervene actively in both spot and forward markets to stabilize the currency. However, these interventions drained system liquidity, exerting upward pressure on money market yields despite liquidity infusion from the 50 bps CRR cut. Live Events Even then, optimism around potential future rate cuts, coupled with relief over fiscal stability—particularly as GST rationalisation is not expected to trigger additional borrowing—helped support G-Sec performance during the month. Inflation Hits Multi-Year Lows India’s CPI inflation dropped to an eight-year low of 1.54% in September, averaging 1.7% for the quarter—below RBI’s own forecast. Puneet Pal notes that while food inflation stayed muted, core inflation rose to 4.6% due to higher gold prices and an unusual month-on-month spike in housing inflation. Core CPI (ex-food, fuel, gold, gasoline) remained at 3.3%, indicating underlying pressures that may ease with GST cuts. Given the sharp disinflation trend, Puneet Pal believes the RBI may revise its inflation target further downward in the next MPC meeting. Yield Curve Steepens as Long-End Demand Weakens Despite lower long-term borrowings announced for H2, the yield curve steepened in October. The first half of the month saw broad yield declines, but a weak long-end auction revived concerns around demand–supply pressures. As per Puneet Pal, longer maturity yields ended the month flat to slightly higher, while the benchmark 10-year bond closed 5 bps lower at 6.53%. He adds that verbal assurances from the RBI may not be enough, and markets are increasingly expecting OMO purchases to address tight liquidity and stabilize the longer end of the curve. RBI Expected to Start OMO Purchases With banking liquidity shrinking due to higher currency in circulation and persistent FX intervention, Puneet Pal expects the RBI to begin OMO purchases next quarter. This will likely be crucial for balancing demand–supply dynamics, especially for longer tenors. The rupee ended October at 88.77—near its all-time low—despite RBI’s active market intervention. Strong FPI Inflows Support the Bond Market Foreign investors continued to show strong interest in Indian debt, bringing in USD 1.97 billion in October, taking year-to-date inflows to USD 8.16 billion. This contrasts sharply with equity markets, which have seen persistent FPI outflows in 2025. CD rates remained steady, with 3-month CDs at 6.00–6.05% and 1-year CDs at 6.40–6.50%. The OIS curve flattened, with the 5-year OIS at 5.67% and the 1-year marginally higher at 5.47%. Globally, easing US yields added support as the Federal Reserve cut rates again, although future rate cuts remain data-dependent. Outlook: Range-Bound Yields Ahead According to Puneet Pal, the bond market is beginning to accept that India is nearing the end of its rate-cut cycle, though one more cut cannot be ruled out. However, adverse supply dynamics at the long end continue to weigh on sentiment. Looking ahead, he expects the 10-year G-Sec yield to trade in a narrow range of 6.30%–6.70% in the coming months, with State Development Loans (SDLs) likely to outperform over the medium term. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times) (You can now subscribe to our ETMarkets WhatsApp channel) (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2025, Share Market on Budget 2025 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .) Subscribe to ET Prime and read the Economic Times ePaper Online.and Sensex Today. Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price ...moreless Nerves of steel: The slump has stabilised, but recovery remains elusive The pipeline reform that may redraw India’s energy map in favour of private cos AI is forcing a rethink. Can Indian IT finally build a serious corporate VC muscle? Why Leyland and Iveco stand between Tata Motors' return to glory Stock Radar: Coromandel International stock showing signs of rebound; check target & stop loss ET Prime Special Series - Part 6: Management’s application of altered accounting rules, some right… some wrong 1 2 3