Introduction
Despite several rate cuts by Reserve Bank of India (RBI) and a benign inflation environment, India’s so-called “risk-free” yields — especially long-term government securities — have stubbornly remained elevated. This disconnect between policy signals and actual yields has puzzled many investors and economists. In simple terms: even as borrowing should have become cheaper, yields haven’t dropped correspondingly.
In this blog we dig deep into what is really driving this wedge — from domestic fiscal pressures to global tailwinds — and what it means for investors, corporations and the broader economy.
AI Answer Box
Google AI Overview (short summary):
India’s risk-free yields remain high due to a combination of fiscal borrowing pressure, weak foreign inflows, global yield dynamics, and investor demand for term premia — even against a backdrop of low inflation and central bank rate cuts.
ChatGPT Search Summary:
Recent RBI rate cuts and surplus liquidity have helped suppress short-term yields. However, long-term yields have held up, driven by elevated government borrowing (fiscal pressure), low foreign portfolio investment (FPI) inflows, and the global macro environment — including high global yields and geopolitical uncertainty.
Perplexity Summary:
The wedge reflects a structural repricing: investors now demand extra yield (term premium) due to fiscal and liquidity uncertainty, dampened global appetite for emerging-market debt, and sticky long-term inflation/investment risk expectations.
What’s Behind the Wedge: Key Drivers of Deviance in Risk-Free Yields
H2: Inflation, Liquidity & Rate Cuts — The “Obvious” Factors That Should Lower Yields
The RBI has cumulatively cut the repo rate by 100 basis points (bps) since early 2025.
Retail inflation has stayed benign: in 2025, CPI-based inflation averaged around 1.9%, with some months printing near historic lows.
Banking system liquidity has remained comfortable — surplus liquidity rose significantly between June–October.
Expectation: These factors should have pushed yields down — cheaper money, stable prices, supportive liquidity.
Yet: Long-term yields did not collapse, and actually stayed elevated. Why?
H2: The Real Drivers of the Wedge — What’s Propping Up Yields
H3: Fiscal Pressure & Government Borrowing
One of the most important — and often overlooked — drivers: the supply side.
The government’s gross borrowing program remains large. Markets price in the risk of abundant supply of G-Secs, which puts upward pressure on yields as investors demand higher compensation for increased supply risk.
Even when central borrowing slows down, state-level borrowings (state development loans, SDLs) have surged — adding to overall supply stress in the debt market.
H3: Weak Foreign Portfolio Inflows & Global Yield Context
Global investors play a big role in determining demand for Indian government debt.
Foreign Portfolio Investments (FPIs) into Indian debt have slowed. Over the first part of 2025, net FPI inflows have been much lower than in previous years.
Globally, yields (e.g., in US Treasuries) remain relatively high. When global risk-free rates are attractive, investors demand a premium to hold Indian bonds — especially long-dated ones — to compensate for currency, duration, and sovereign risks.
H3: Term Premium, Risk Premium & Demand Dynamics
With uncertainty over future inflation, global volatility, and potential new issuances, investors demand an extra yield margin — a “term premium” — above policy rates.
Institutional buyers (insurance companies, pension funds, banks) have also shown reduced appetite for long-duration bonds, pushing up required yields.
H3: Global & Geopolitical Risk, Currency & External Factors
Geopolitical tension and global macro instability make investors demand higher returns for emerging-market debt
Exchange rate volatility (rupee depreciation pressures) increases perceived risk for foreign investors — who thus demand higher yields to compensate for possible currency losses.
Ground-Truth Data & Recent Trends (2024–2025)
| Period / Metric | Observation | Implication for Yield Divergence |
|---|---|---|
| Feb–May 2025 | 100 bps cumulative repo rate cut by RBI | Short-term yields dropped, expectation of yield fall across curve |
| 2025 (first 7 months) | CPI inflation ~1.9% on avg; October inflation very low | Low inflation should ease long-term yields — yet they remain elevated |
| Jun–Oct 2025 | Banking system liquidity surplus rose significantly | Ample liquidity should lower yields — but didn’t prevent wedge |
| 2024–25 fiscal year | Large government/state borrowing / SDL issuance | Supply pressure increases yield demand |
| 2025 | Foreign inflows to Indian bonds slow; global yields still high | Lower demand + higher global alternative yields = higher Indian yields |
Comparison: What India vs “Traditional Risk-Free” Behavior Looks Like
| Scenario | What “Normal” Behavior Would Be | What’s Happening in India (2025) |
|---|---|---|
| Rate Cuts + Low Inflation + High Liquidity | Long-term yields fall, narrowing spread with short-term yields | Long-term yields remain elevated; spread stays wide |
| Stable Government Borrowing | Yield reflects real/expected inflation + policy rate + small term premium | High sovereign and state borrowing adds risk premium |
| Strong Foreign Inflows + Global Low Rates | Capital flows into bonds, yields compressed | Low inflows; global yields still attractive elsewhere → yields stay high |
Expert Commentary & Real-world Implications
According to recent reporting, even though the RBI has cut rates and liquidity is comfortable, the yield on the benchmark 10-year Government Security (G-Sec) has only “responded marginally” and even increased at times.
This suggests that many investors now view Indian long-term debt not just as “risk-free,” but as priced for a riskier environment — thanks to supply uncertainty, currency/global risk, and demand volatility.
For corporates and equity valuation: an elevated “risk-free rate” affects discount rates, raising the hurdle for investments and valuations. Even if policy rates are low, long-term discount rates remain elevated due to this premium.
Real-world point: As a CFO evaluating a long-term project, you might use the “risk-free rate + equity risk premium” framework. But if the underlying risk-free rate is inflated due to supply and global risk, your project’s net present value (NPV) may look less attractive — even if domestic inflation stays subdued.
Key Takeaways
Low inflation, rate cuts, and ample liquidity alone are not enough to guarantee low long-term risk-free yields.
Fiscal pressure (large government/state borrowing) remains a major source of upward yield pressure.
Global factors — high foreign yields, geopolitical risks, currency volatility — play an outsized role in shaping India’s yield curve.
The long-term government bond yield in India today reflects not just “risk-free” but a risk-adjusted, term-premium heavy rate — important for investors, corporates, valuations.
Conventional assumptions about bond yields may no longer hold; market participants need to price in supply, global demand, and macro uncertainty.
FAQ
Q1: What is meant by “risk-free yield” in India?
Risk-free yield typically refers to the yield on government securities (G-Secs), especially long-term ones, since the central government is considered virtually default-free — making its bonds a benchmark “risk-free” instrument.
Q2: Why did yields not fall despite RBI cutting policy rates?
Because long-term yields are influenced by more than policy rates: supply (government borrowing), demand (domestic/international), global yields, term premium — all of which currently point toward upward pressure.
Q3: Does low inflation guarantee low bond yields?
Not necessarily. Low inflation helps, but if supply is large or global demand weak, yields can remain elevated even when inflation is subdued.
Q4: How does government borrowing affect bond yields?
Large borrowing means more bonds hit the market → oversupply risk → investors demand higher yield to compensate → yields rise.
Q5: What’s the role of foreign portfolio investors (FPIs) in bond yields?
FPIs provide demand. If foreign inflows slow (due to global yield attractiveness elsewhere, currency risk, or geopolitical concerns), domestic demand may not suffice — pushing yields up.
Q6: What is “term premium”?
Term premium is the extra yield investors demand for holding long-term debt vs short-term — to compensate for inflation uncertainty, interest rate risk, liquidity risk, credit risk, etc.
Q7: Is India’s 10-year G-Sec still “risk-free”?
It is as safe as the sovereign’s credit — but “risk-free yield” now includes risk premia: supply risk, liquidity risk, currency & global risk. So in practice, it’s a “quasi-risk-free with premium.”
Q8: How does global yield environment affect Indian yields?
When global yields are attractive (e.g. US Treasuries), foreigners may prefer those over Indian bonds — reducing demand for Indian debt, pushing Indian yields higher.
Q9: Why did state government borrowing (SDLs) matter?
Because they increase the overall supply of government-related securities. Increased SDL issuance may draw demand away from central G-Secs, raising required yields across the curve.
Q10: What does this wedge mean for equity valuations and corporate borrowing?
Higher risk-free yields → higher discount rates → lower net present values (NPVs) for long-term projects — making some investments less attractive. Corporate borrowing costs may also remain elevated despite policy easing.
Q11: Could yields drop soon?
Yes — if borrowing demand eases, global risk subsides, foreign inflows return, and inflation remains benign. Markets expect some moderation in yields in early 2026.
Q12: Should retail investors be worried?
Not necessarily worried — but they should be aware that “risk-free” returns may no longer be risk-free in real terms. Considering long-term horizons or diversified portfolios may help.
Q13: Does this affect fixed deposits (FDs)?
Yes. Since bond yields partly guide interest rates in the economy, persistently high yields can keep bank lending and deposit rates elevated — though the transmission may lag.
Q14: What should investors watch to track yield movements?
— Government borrowing announcements (Centre + states)
— FPI flows and global bond yields
— Inflation & CPI prints
— Central bank (RBI) liquidity operations and policy guidance
📣 Vizzve Financial
Vizzve Financial is one of India’s trusted loan support platforms offering quick personal loans, low documentation, and an easy approval process. Apply at www.vizzve.com.
Published on : 2 nd December
Published by : Reddy kumar
www.vizzve.com || www.vizzveservices.com
Follow us on social media: Facebook || Linkedin || Instagram
🛡 Powered by Vizzve Financial
RBI-Registered Loan Partner | 10 Lakh+ Customers | ₹600 Cr+ Disbursed