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MUMBAI: The Reserve Bank of India may have delivered a cumulative 125-basis-point cut in the repo rate since February 2025, but financial conditions have failed to ease in ways typically associated with monetary loosening. With the rate-cut cycle now widely expected to pause, the central bank is likely to rely increasingly on liquidity measures to ease conditions instead, economists said.

In a report dated 11 February, Barclays said financial conditions have actually tightened in recent months, driven largely by government and corporate bond markets. Over the one-year period since the start of the easing cycle, policy rate cuts were accompanied by durable liquidity infusion via open market operation purchases and foreign exchange swaps.

Still, the yield on the 10-year benchmark government bond is higher by 7 basis points (bps) over the one-year period since the easing cycle began in February 2025, reflecting supply concerns from both the Centre and states and weak investor appetite rather than the policy stance. The yield currently stands at 6.67%.

The easing cycle began with a 25-basis-point cut in February 2025. Government borrowing costs initially declined, with yields falling by about 60 bps by May 2025. But after mid-2025, yields resumed an upward trend even as policy rate cuts continued through December 2025.

“This statement that this easing cycle has not been associated with easing in bond yields is a fact. It’s not a prediction," Gaura Sengupta, chief economist at IDFC First Bank said.

Unlike past rate cut cycles, credit-to-deposit (CD) ratios have continued to rise, making this cycle an unconventional one. Typically, CD ratio dips during a rate cut cycle, allowing banks greater room to absorb government securities.

“The standout characteristic is that credit-to-deposit ratios continue to rise in a rate cutting cycle. With credit growth going to now 14.5% and deposit growth lagging, that has affected bank demand for government securities because they have to fund credit offtake," said Sengupta.

For the fortnight ended 31 January, CD ratio remained elevated at 82.3%, marking the third consecutive fortnight at an all-time high, as per report by CareEdge Ratings dated 17 February. Sengupta expects CD ratio to remain high in FY27 as well.

At the same time, higher government borrowing has added to supply pressures in the bond market, further limiting the impact of policy easing on yields.

On 1 February, the government announced a higher-than-expected gross borrowing programme from dated securities for FY27 at ₹17.2 trillion and net borrowing at ₹11.7 trillion, which pushed the 10-year benchmark government bond yield up by 5 bps the next day. The February policy then weighed further on sentiment, with no open market operation (OMO) announcement in contrast to market expectations, driving yields higher by another 9 bps on 6 February.

Together, elevated borrowing needs and weaker bank demand have kept bond yields sensitive to supply-demand dynamics despite policy rate cuts.

Against this backdrop, economists expect the next leg of support for the bond market to come from active debt management and liquidity operations rather than further rate cuts.

“The switch by the RBI has really helped in FY26. They can do more but they have to do it by March. They can also do buybacks. Buybacks can be done in the course of FY27," Sengupta said.

Bond switches involve replacing short- or medium-term securities with longer-tenor papers to smoothen the maturity profile, while buybacks allow the government to retire bonds ahead of schedule when it has adequate cash balances.

Market participants now expect the RBI to conduct OMOs, especially after governor Sanjay Malhotra said at the post-policy conference on 6 February that the central bank would remain proactive in liquidity management and that policy rates would stay low for a prolonged period.

Importantly, this is unfolding at a time when the rate cut cycle has ended and there are no fresh inflows into government bonds like that market witnessed in FY25 following the inclusion into JP Morgan Chase & Co’s emerging markets bond index. As a result, Sengupta expects upward pressure on yields in the first half of FY27, with the only support coming from the RBI through OMO purchases.

In FY26, RBI conducted net OMO purchases totalling ₹6.9 trillion and buy/sell swaps of $25 billion. In FY25, RBI conducted net OMO purchases of ₹2.95 trillion, according to data from the economic research team of IDFC FIRST Bank.

While transmission through the banking system is largely complete, Madan Sabnavis, chief economist at Bank of Baroda, said bond markets operate differently and are driven more by market conditions than by the repo rate alone. Even if net borrowing is managed, gross issuance will remain elevated in coming years, he warned.

“The market is going to price it that way. And the price is fair as far as the market is concerned," Sabnavis said.

A majority of economists now expect the RBI to remain on hold through FY27 and possibly beyond. “We maintain our view of a prolonged pause," Anubhuti Sahay, Head India Economic Research at Standard Chartered Bank, said.

The view assumes no major commodity shocks, stable US rates and inflation near the 4% target. “Growth is moderating but not to an extent to trigger another round of easing… With inflation likely to stay close to the medium term target of 4%, there is no case for a hike either." .

Sahay also argued that rise in bond yields is reflective of typical market behaviour at the end of the easing cycle. “It's typical market behaviour that when we are at the end of the easing cycle, bond yields start moving higher. Markets are always forward looking…probability of the next move, whenever it is, in India is expected to be a hike, not a cut."

Sameer Narang, chief economist at ICICI Bank, said expectations of further cuts are difficult to justify given current macro conditions.

With inflation projected around target and growth near 6.8-7%, “it is possible that if inflation remains around these levels, then you can have rates low for longer. We expect a long pause, extended pause for now," he said.

On 14 February, Mint reported that the newly adopted inflation measurement series is also unlikely to significantly shift the price trajectory, while the central bank also awaits the release of revamped GDP data on 27 February, economists said.

The statistics ministry last week released the first inflation print under the new series, with 2024 as its base year, for January 2026, which came in at 2.75%. While comparable inflation figures are not available for previous months due to statistical limitations, an assessment of month-on-month movement in Consumer Price Index (CPI), also released on Thursday, shows rising price pressures, similar to the trajectory already visible under the earlier 2012 series.

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