Debt market

	30/09/2026	31/08/2026	Change (bps)
10 Year Benchmark Yield (s.a)	7.19	6.95	24
10 Year AAA (PSU) (ann)	7.90	7.65	25
5 Year AAA (PSU) (ann)	7.85	7.55	30
3 Year AAA (PSU) (ann)	7.74	7.60	14
1 Year AAA (PSU) (ann)	7.65	7.55	10
3 Month T Bill	5.52	5.28	24
3 Month CD	6.55	6.90	-35
6 Month CD	6.75	7.00	-25
9 Month CD	7.45	7.10	32
12 Month CD	7.65	7.35	30
10 Year AAA Spread	71	67	4
5 Year AAA Spread	95	75	20

Indian Bonds yields moved higher due to upwards movement in bond yields of developed markets, Brent Crude Oil trading above 100 dollars per barrel, India CPI inflation expected to go up due to El Nino effect ( All india rainfall deficit at 13 percent), OMO sales of RBI by Rs 1 Lakh Crores. India current depreciation even with record inflows of 127 billion in FCNR B scheme . These Adverse developments, led to bond market repricing repo rate hikes from 75 basis points to 125 basis points, as market feels RBI is behind the curve in terms of rising rates and have to do more to reduce CPI inflation. Credit growth continues to remain strong at 18 percent while deposit growth increased by 17.2 percent due to inflows of FCNR B deposits.

US interest rates increased as private sector is raising more debt to fund its AI data centres . US government is competing with the private sector to rise fund its revenue shortfall.US ten-year bond yields moved above 5 percent, and the 30-year bond yield is above 5.5 percent. Given that US government debt has already crossed 40 billion USD and there is no crediable action plan to bring it down, the view of market players is of 30 year bond yields moving above 6 percent. The 2 year bond yields is trading around 5 percent levels , on expectation of two more hikes by the US Federal Reserve even though the dot plots of FOMC indicates one more rate hike only. As per FOMC projections, US CPI inflation will come down to 2 percent only in 2029. Rates will be higher for longer in this scenario. US growth and non farm payroll date continues to remain strong with unemployment rate at 4.2 and payroll date for September at 29000. The average monthly run rate of non farm payroll is 45000. US CPI inflation continue to run high at 3.4 due to higher gasoline pump prices, effect of US Iran war. The Federal Reserve is switching from its dual mandate of maximum employment and price stability to price stability. US CPI Inflation has been running above 2 percent for last 65 months. Given full employment levels, the Fed chairman stated it is time to focus on CPI inflation as the effect is felt disproportionately on lower wage earners who don’t have any financial assets.

Indian market reacted to US Fed hawish comments with the ten year Indian bond yields moving above 7 percent. Bond yields strengthened further with the announcement of second half borrowing programme with larger supply in the long dated securities against market expectation of similar issuances like in the first half of the current financial year. RBI has received 127 billion of FCNR B Schemes, which was expected to bring down short term rates as banks deploy this surplus in government securities and AAA Corporate bonds. Around 48.5 percent of total FCNR B deposits is for 5 years and the balance 41 percent is for 3 years and 10 percent is for more than 3 but less than 4 years. However, banks are repaying their high-cost deposits and catering to loan demand of corporates with the inflows of FCNR B deposits received.

RBI has been doing sell buy swap in the forex markets to reduce its forward dollar short positions. RBI forward dollar short position has increased to record 201 billion USD with 176 billions in over one year maturity due to forex sales in the forward markets. This strategy of sell buy swap is simultaneously providing dollars to the spot market and reducing its short dollar positions in the forward markets. RBI has done OMO of Rs 1 lakhs to take out surplus liquidity in the banking system and there has been a outflow for advance tax, GST Collections and increase in currency in circulation. This has led to surplus liquidity falling from 12 lakh crores to less than 5 lakh crores in the overnight markets. The three month CD rates which has come down to 5.8 levels has gone back to 6.4 levels and the one year rates which has come down to 7.25 levels has moved up to 7.70 levels. The 2- and 3-year rates have moved to 7.75 levels, and the 5-year yields are trading at 7.90 levels.

India CPI inflation is at 4.8 percent with 40 percent of items in CPI basket experiencing inflation of more than 4 percent. Kharif sowing acreage has been as per last year, but productivity and yields are expected to be lower, due to deficient rainfall in most districts. Food inflation is expected o be higher due to global draught conditions prevailing in Europe and US, which should affect wheat production. September reading of CPI inflation is expected to be above 5 percent and all further reading for this financial year is expected to be above 5 percent levels. Growth continues to remain robust with finance ministry predicting 7.3 percent growth for the second quarter of 2026.

Markets expect further OMO sales and CRR hike of 50 basis points in the coming monetary policy meeting alongwith a repo rate hike of 25 basis points. Market expects hawkish statement for RBI to control inflation. Indian bond markets will now move with geopolitical developments and supply restrictions on movement of goods in strait of Hormuz. Market is expected to be volatile due to this development. However, this gives good buying opportunities to investors having a one-year horizon due to attractive yields available for 3 months to 40 years in bonds. YTM of debt funds are higher than bank deposit rates due to higher carry available in these funds. For short time frame investors, they can look at ultra short and money market funds for investment. Investors can consider longer terms fund if their investment horizon is above one year.