RBI's cash-drain moves trigger fears of a prolonged slump in Indian bonds

In response to an unprecedented cash surplus of roughly ₹11 trillion, the Reserve Bank of India launched open-market bond sales to withdraw about ₹1 trillion from the banking system, sending the 10-year government yield to 7.08%. Traders fear this liquidity squeeze, combined with accelerating inflation and a global debt sell-off, could keep yields elevated, possibly reaching 7.25% before the end of the year. Major underwriters such as ICICI Securities Primary Dealership and IDFC First Bank anticipate the benchmark surpassing its 2026 peak.

The RBI may need to extract an additional ₹2 trillion using short-term FX swaps or Market Stabilisation Scheme instruments, according to QuantEco Research. Analysts also note that shorter-term yields have already jumped sharply, and foreign investors are pulling out of index-eligible Indian bonds. The central bank’s actions come as inflation edges toward the upper bound of its 2-6% target range, prompting expectations of a 25-basis-point policy-rate hike in October.