Domestic Anchors, Global Shadows
Indian fixed income enters September with a broadly supportive domestic foundation, but with less room for a one-way duration view. The Reserve Bank of India maintained the policy repo rate at 5.25% and retained its neutral stance in August1, preferring to await clarity on the persistence and breadth of inflation. July headline Consumer Price Index inflation edged up to 4.45%, with food inflation at 5.52%2; while price pressures have risen, the Reserve Bank continues to assess the increase as predominantly food- and fuel-led rather than evidence of broad demand overheating.
Growth conditions remain resilient enough to allow monetary policy to stay patient. The Reserve Bank projects real Gross Domestic Product growth of 6.7% in 2026-273, supported by private consumption, investment, construction, capital goods and bank credit. At the same time, its inflation projection of 5.0% for 2026-273, including a possible peak of 5.9% in the third quarter3, warrants vigilance against second-round effects from food, fuel and other input costs.
Liquidity remains an important support for the front end, although it is being actively managed rather than allowed to remain indiscriminately loose. As of 25 August, overnight money-market rates were close to the policy corridor, while the Reserve Bank was absorbing sizeable surplus funds through the variable-rate reverse-repo operations (VRRR). Net durable liquidity was reported in surplus at the latest available reference date, suggesting that the system has an underlying liquidity cushion even as day-to-day conditions are fine-tuned.
The yield curve, however, is carrying more of the adjustment burden than the policy rate. On 25 August, indicative yields were approximately 6.04% in the 1–2-year segment, 6.47% around five years, 6.87% around ten years and 7.49% around thirty years4. This positive slope offers carry and roll-down opportunities, but the higher yield available at the long end should not be viewed independently of its materially elevated price sensitivity.
Supply also remains relevant. The Government’s adjusted gross market-borrowing programme for 2026-27 is ?16.09 lakh crore, of which ?8.20 lakh crore is scheduled for the first half5. Issuance is distributed across the curve, with the ten-year segment accounting for the largest share of the first-halfprogramme; consequently, auction supply and investor demand are likely to remain important drivers of term premium even if the policy rate remains unchanged.
Global bond markets continue to cast a shadow over domestic yields. US Treasury yields rose during the latest Federal Open Market Committee inter-meeting period as real yields and expectations of tighter policy increased, while longer-dated sovereign yields in the US, Japan and Europe remained elevated in late August6. Global fiscal supply, changing central-bank expectations and Japan’s return to positive domestic duration have raised the compensation investors require for holding long-maturity bonds internationally.
India is not insulated from this repricing. Higher global yields can affect Indian bonds through foreign-portfolio flows, the rupee, imported inflation, crude oil and the relative attractiveness of domestic duration. Nevertheless, India’s bond market is becoming more domestically anchored: commercial banks and insurance companies held 32.99% and 25.59%, respectively, of Central Government dated securities at end-March 2026, while provident and pension funds held a further 4.50% and 4.62%7. Recent demand for long-dated securities from insurers and retirement-oriented institutions also demonstrates that the structural buyer base remains meaningful.
We would therefore describe India as domestically driven, but not globally decoupled. Domestic savings, regulatory demand, liability-matching investors and Reserve Bank liquidity operations can moderate the transmission of global volatility; they cannot eliminate it. This argues for a portfolio approach that earns carry patiently, retains the ability to adjust duration and avoids relying on a single macro-outcome.
Outlook
For September, we expect Indian yields to remain sensitive to incoming inflation data, government-bond supply, liquidity operations, crude oil, the rupee and movements in global sovereign curves. The combination of comfortable domestic liquidity and a deep institutional buyer base should provide resilience, but the Reserve Bank’s neutral stance and the projected rise in near-term inflation limit the case for aggressively extending duration at current levels.
Against this background, accrual is becoming incrementally more relevant than a pure duration-led strategy. The upward-sloping curve allows portfolios to improve carry through selectively chosen high-quality bonds without having to depend entirely on a sharp decline in market yields. Duration can still add value when yields overshoot or domestic inflation remains contained, but it should be deployed within a measured range rather than as a one-way directional position.
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