Summary:
MUFG sees India’s 10-year yield edging higher through 2026
Bank forecasts 6.60% by March and 6.75% by year-end
RBI seen at end of rate-cut cycle, repo rate held at 5.25%
Liquidity injections via bonds and FX swaps to continue
USD/INR likely driven more by global factors than local yields
India’s benchmark government bond yields are likely to drift modestly higher over the course of 2026, as the Reserve Bank of India (RBI) approaches the end of its rate-cutting cycle while continuing to manage liquidity aggressively, according to MUFG.
In a research note, MUFG said it expects India’s 10-year benchmark bond yield to rise gradually to around 6.60% by March and toward 6.75% by the end of the year, from current levels near 6.65%. The bank characterised the outlook as one of upward bias rather than sharp tightening, reflecting a policy environment that is shifting from easing toward an extended hold.
MUFG said it believes the RBI has effectively reached the end of its rate-cutting cycle and expects the central bank to keep the repo rate unchanged at 5.25% for a prolonged period. With inflation risks appearing broadly contained and growth holding up, policymakers are seen as favouring stability over further stimulus or premature tightening.
While policy rates may be on hold, liquidity management is expected to remain highly active. MUFG expects the RBI to continue injecting liquidity through bond purchases and foreign-exchange swaps through 2026, reinforcing its role in smoothing funding conditions even as rates remain steady. The scale of past intervention underscores that commitment: in 2025, the RBI injected a record 11.73 trillion rupees into the banking system via bond buying, FX swaps and a reduction in the cash reserve ratio.
The bond-market outlook also has implications for the currency. The Indian rupee (attached USD/INR chart) highlights a steady (INR) downward grind, with the pair recently trading around the 90.30 area USD/INR bounced from intervention lows. . A mild rise in domestic yields could offer some support to the rupee at the margin, particularly if U.S. rate expectations stabilise. However, MUFG’s view that liquidity will stay abundant suggests that yield support for the currency may be limited.
Instead, USD/INR is likely to remain driven by broader dollar dynamics, capital flows and RBI FX operations rather than domestic rate moves alone. Continued RBI liquidity injections and FX swaps also point to an ongoing effort to dampen currency volatility rather than defend any specific level.
Overall, MUFG’s outlook suggests a year of relative stability for Indian bonds, with modest yield drift higher, an RBI firmly on hold, and a rupee that remains range-bound but sensitive to global forces rather than domestic tightening pressure.
