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India's Bond Bear Market: Why Yields Could Stay High Through FY26

A new report from Emkay Research paints a challenging picture for India's bond market. It predicts the current bearish cycle will continue through the rest of the 2026 fiscal year. The analysis points to a mix of structural issues and fiscal pressures keeping yields elevated. Without meaningful adjustments, these conditions could even start to weigh on stock market valuations.

Key Points: Emkay Report Sees Bearish Bond Cycle Lasting Through FY26

  • Report warns of a "perpetual bear-steepening" phase in Indian bond markets
  • Elevated yields driven by structural issues, cyclical pressures, and one-off factors
  • Fiscal pressures, especially at state level, contribute to higher term premia
  • Rising real rates and cost of capital could negatively impact equity valuations
3 min read

Bearish bond cycle to persist through FY26; 10-year yield seen at 6.55-6.70%: Report

Emkay Research warns India's bond bearishness will persist through FY26, with 10-year yields at 6.55-6.70%, driven by structural and fiscal pressures.

"We believe bond bearishness, driven by a mix of structural, cyclical, and one-off factors--is likely to persist through rest of FY26 - Emkay Research Report"

New Delhi, 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 factors--is 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.

- ANI

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Reader Comments

P
Priya S
The report is quite detailed, but I wish it offered more solutions. It's all well to say structural issues persist, but what can the government or RBI actually *do*? The mention of state-level fiscal problems is worrying. We need stronger coordination between the centre and states.
R
Rohit P
So basically, no relief for home loan borrowers or businesses seeking credit anytime soon. If the cost of capital remains high, it will eventually hit economic growth and job creation. The "Goldilocks" phase seems to have missed India completely. Tough times ahead for the common man's wallet. 💸
S
Sarah B
As an NRI looking to invest in Indian bonds, this persistent bearishness is actually an opportunity? Higher yields mean better returns if you're buying and holding to maturity. The key is timing your entry. This report gives a clear timeframe to plan around.
V
Vikram M
The analysis on demand fatigue from banks and insurance companies is spot on. They were the backbone of the market. If their appetite is down, who will absorb all the government borrowing? This is a fundamental supply-demand mismatch that needs urgent policy attention.
K
Karthik V
While the report is technically sound, I respectfully disagree with the very pessimistic tone till FY26. A lot can change with a good monsoon, softer global commodity prices, or decisive government action. Indian markets have a history of surprising on the upside. Let's not write off the possibility of a positive turn.

We welcome thoughtful discussions from our readers. Please keep comments respectful and on-topic.

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