RBI’s liquidity clamp pushes India’s 10‑year bond yield to 7.35%

RBI’s liquidity clamp triggers steep rise in 10‑year yield

Indian government bonds tumbled on Monday, with the benchmark 10‑year yield climbing to 7.35%, the highest level in three years. The rally followed the Reserve Bank of India’s announcement of a suite of liquidity‑draining measures, including a Variable Rate Reverse Repo (VRRR) auction and an open‑market sale of sovereign bonds.

What the RBI announced

The central bank said it would conduct a VRRR auction on Tuesday, October 13, 2026, offering ₹1,50,000 crore at a one‑day tenor. In the same statement, the RBI disclosed plans to sell ₹250 billion of government securities and to lift banks’ daily cash‑reserve‑ratio (CRR) maintenance thresholds. It also redirected oil‑company dollar purchases away from the spot market, a move aimed at supporting the rupee.

Market reaction and inflation backdrop

The yield on the 2036 bond rose nearly nine basis points to 7.3857%, while the 10‑year benchmark surged to 7.35%, marking the steepest one‑day rise in over six months. Over the previous eight weeks, the 10‑year yield had climbed 54 basis points. At the same time, September consumer inflation accelerated to 5.54%, slightly above the Reuters poll estimate of 5.40%, underscoring lingering price pressures.

Expert view

Akhil Mittal, senior fixed‑income fund manager at Tata Asset Management, said the data “reiterates our view of a total 75‑100 bps rate‑hike cycle.” He added that inflation could linger in the 5.30‑5.40% band into FY27, with a possible uptick in Q1 FY28. Nomura’s note warned that policymakers face the “impossible trinity” and may need to deploy a broader toolkit if global conditions deteriorate.

Impact on short‑term rates

India’s overnight indexed swap (OIS) curve steepened sharply. The one‑year OIS jumped 11.75 bps to 6.36%, the two‑year to 6.55%, and the five‑year to 6.7975%. Traders expect the combined RBI actions to tighten banking‑system liquidity, a necessary step after the first rate hike in nearly four years.

Why it matters

The RBI’s decisive liquidity‑management agenda signals a commitment to contain inflation and safeguard the rupee, even as bond markets react sharply. By using both market operations and regulatory levers, the central bank aims to steer the economy toward stable growth while keeping credit conditions under control.