The Indian bond market is currently experiencing a notable disconnect between central bank actions and market yields. Despite a cumulative **125 basis point** reduction in the repo rate during this easing cycle, benchmark yields remain stubbornly high. As of February 2026, the **10-year G-Sec yield** is hovering around **6.65% to 6.67%**, holding steady even as the Reserve Bank of India (RBI) maintains a neutral stance. This creates a spread of approximately **140 to 150 basis points** over the current repo rate of **5.25%**, a gap rarely seen during easing phases. Structural liquidity tightness within the banking system is the primary driver of this trend. While the RBI has kept rates on hold in its latest February meeting to assess the impact of previous cuts, banks are struggling with a widening credit-to-deposit gap. Credit growth is currently outpacing deposit mobilization by roughly **200 to 300 basis points**, pushing the system-wide credit-to-deposit ratio to a historic high of **81.75%**. Domestic banks, the traditional backbone of the G-Sec market, are facing severe margin pressures. Net Interest Margins (NIMs) have compressed by **10 to 15 basis points** for many private lenders as the cost of funds rises. Consequently, banks are prioritizing high-yield lending over government securities, leading to thinner demand for sovereign paper. To address these challenges, the RBI has deployed proactive liquidity measures. Since December, the central bank has conducted Open Market Operation (OMO) purchases totaling **₹3.5 lakh crore** and long-term forex swaps of **$15.1 billion**. These interventions aim to ensure that surplus liquidity, which has recently averaged **₹70,000 crore** per day, remains durable enough to support policy transmission. Foreign Portfolio Investor (FPI) activity remains a critical variable. While inclusion in global bond indices has provided a structural tailwind, capital flows have been volatile. A net outflow of **$3.9 billion** was recorded as of late 2025, largely due to global shifts toward AI-centric markets in the US and East Asia. However, recent regulatory reforms—including the removal of the **₹2.5 lakh crore** cap under the Voluntary Retention Route (VRR)—are expected to stabilize debt inflows. The outlook for the remainder of the year suggests a gradual softening. Analysts project the 10-year yield could ease toward **6.54%** over the next **12 months** if headline inflation stays near the projected **2.1%** for the fiscal year. For now, the market remains in a "wait and watch" mode, balancing the supply of new government debt against the central bank's efforts to keep the financial system sufficiently oiled. [Indian Government Bond Market Outlook](https://www.youtube.com/watch?v=_gyaY5WdLfY) This video provides additional context on recent Union Budget reforms and their direct impact on attracting global investors to the Indian bond market. http://googleusercontent.com/youtube_content/0