New Delhi [India], December 19 : The bearish cycle in India's bond market is likely to continue through the rest of FY26, with the benchmark 10-year government bond yield expected to hover in the 6.55-6.70 per cent range, according to a report by Emkay Research.
The report noted that Indian bonds remain stuck in what it described as a "perpetual bear-steepening" phase, reflecting pressures similar to those seen in developed markets.
It stated "We believe bond bearishness, driven by a mix of structural, cyclical, and one-off factorsis likely to persist through rest of FY26, with the 10Y yield hovering in the 6.55-6.70 per cent range".
While macroeconomic conditions vary across economies, the report highlighted a common theme of policy-related challenges, rising term premia and the growing risk of fiscal dominance over monetary policy.
Although India's situation is not as severe as that of many developed markets, the report pointed out that the country has failed to benefit from a so-called "Goldilocks" environment of comfortable inflation, strong growth and an easier interest rate regime.
This suggests deeper structural stress within the bond market despite an overall improvement in India's combined fiscal and debt trajectory over time, barring the recent years.
The report warned that persistently higher interest rates and a broken monetary transmission mechanism (MTM) could increasingly expose equity markets to risk. Rising real rates and a higher cost of capital, if sustained, may weigh on equity valuations across sectors.
According to the report, the ongoing bearishness in bonds is being driven by a mix of structural, cyclical and one-off factors, which are expected to keep yields elevated through FY26.
While FY27 could see some degree of curve flattening, the report cautioned that the balance of risks remains tilted towards a bear flattening, rather than a sustained easing phase. Even if certain one-off pressures ease in FY27, unresolved structural issues are likely to maintain a higher-for-longer interest rate environment.
On the fiscal front, the report highlighted incrementally worsening fiscal profiles, especially at the state level. While India's overall fiscal and debt position has improved post-CY20 compared to developed markets, recent deterioration is evident in the form of elevated State Development Loan (SDL) spreads.
Another key pressure point identified was the lagged supply response of fiscal funding. The report noted that the large supply of long-dated government securities and SDLs reflects an earlier shift in demand from long-term investors such as insurance companies, provident funds and pension funds. However, this demand trend appears to have peaked, while supply has yet to adjust meaningfully.
Finally, Emkay pointed to demand fatigue among captive investors, particularly banks. In CY25, banks' appetite for bonds has weakened due to MTM losses on their statutory liquidity ratio (SLR) holdings.
Overall, the report suggested that without addressing these structural challenges, India's bond market is likely to remain under pressure, with elevated yields persisting well beyond the near term.
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