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RBI Drains Cash, Flattens India's Bond Yield Curve; Investors Eye 10-Year Debt
M
Moneycontrol•05-10-2026, 07:02
RBI Drains Cash, Flattens India's Bond Yield Curve; Investors Eye 10-Year Debt
- •India's bond yield curve is set to flatten further as the Reserve Bank of India (RBI) intensifies liquidity withdrawals, leading some investors to favor 10-year debt over five-year notes.
- •The five- to 10-year yield gap is expected to narrow as the RBI's cash drainage pressures shorter maturities, with the five-year yield potentially rising to 7% if the central bank maintains aggressive tightening.
- •The RBI is withdrawing funds due to excess banking-system liquidity, having already absorbed over 1 trillion rupees ($10.4 billion), to contain prices and put upward pressure on shorter-dated yields.
- •Some investors are strategically positioning for a flatter curve, with recommendations to sell five-year benchmarks and buy 10-year bonds to benefit from the narrowing yield gap.
- •The RBI is anticipated to raise its policy rate by 25 basis points to 5.50% on Wednesday, with any indication of further aggressive tightening likely to increase pressure on the short end of the curve.
Key Questions Answered
The Reserve Bank of India is stepping up liquidity withdrawals and draining surplus cash from the banking system, which places upward pressure on shorter-dated maturities and causes the yield curve to flatten.
Experts expect the yield gap between five- and 10-year notes to narrow significantly to as little as 10 basis points as the central bank aggressively tightens policy and drains cash.
A majority of economists surveyed by Bloomberg expect the RBI to raise its policy rate by 25 basis points to 5.50%, marking its first increase since February 2023.
