Who decides your bond's yield?

1Ravi's bond

In September 2021 a school teacher in Pune called Ravi did something careful with his savings.

His daughter was 5. She would start college around the end of 2035. So Ravi went looking for something safe that would pay him a steady income until then and hand his money back right on time. He found a bond issued by the Government of India itself. It was called 6.67% GS 2035. It paid 6.67 percent a year, and it would repay every rupee on 15th Dec 2035. On 9th Sep 2021 he bought it at its very first sale, at ₹100.

Ravi is made up. His bond is real, and so is everything that happened to it next.

For a few months nothing much happened. Then the price began to slip. ₹99.23 in December. ₹97.04 in January. ₹94.42 in April. By May 2022 the RBI's own auction priced Ravi's bond at ₹92.10. His safe government bond was showing a loss of almost 8 percent.

Ravi did what most of us would do. He checked the news to see what the RBI had done. The answer was: nothing. The RBI's interest rate had sat at 4 percent the entire time.

So who was moving the price of Ravi's bond? He is not the only one who has asked. Years later, 2 readers on TradingQnA ran into the same puzzle from opposite ends. The first wrote 3 days after the RBI cut its rate:

RBI reduced rate by 50 basis point couple of days ago. I learned when RBI reduce interest rate - NAV of Gilt funds should go up [...] All above funds NAV is reduced by about 0.25-0.50% in a day. Can someone explain ?

curiousvi, TradingQnA, 9th Jun 2025

The second was watching the longest government bonds while the RBI did nothing at all:

Also INDIA 30 year yield is also at around 2 year high even though there is no such rate increase from RBI. Then what is our gilt market antcipating?

Aditya_Gupta, TradingQnA, 1st Dec 2025

3 people, 3 puzzles. The RBI stood still and bonds fell. The RBI cut and bonds fell. The RBI stood still and long rates rose. By the end of this chapter, all 3 will make sense.

2A yield is just a price

Start in a fruit market in April. The first mangoes of the season arrive. There are only a few crates, and lots of people want them, so they are expensive. By June, trucks full of mangoes arrive every morning. The same mango now costs half as much.

Nobody voted on that price. No committee announced it. It came from 2 things: how many mangoes there were, and how many people wanted them. That is demand and supply.

Money works the same way. The yield on a bond is the price of borrowing money for that long. When lots of people want to lend and few want to borrow, lenders accept less, and yields fall. When borrowers need a lot and lenders are cautious, lenders ask for more, and yields rise.

Now the part that confuses everyone: why does a higher yield mean a lower price for a bond you already own? Here is a way to see it that has nothing to do with bonds.

Say you rent out your flat on a 15 year agreement at a fixed ₹20,000 a month. A year later, flats like yours are renting for ₹24,000. Your tenant is happy. You are not. If you tried to sell the flat with that agreement attached, a buyer would pay you less for it, because it is locked into the old rent for 14 more years.

Ravi's bond is that rental agreement. It pays a fixed 6.67 percent for 14 years. Once new government bonds were paying around 7.6 percent, nobody would pay full price for his 6.67. So the price of his bond fell until it offered a buyer the same deal as the new ones.

A yield is the price of borrowing money. Demand and supply set it. When that price rises, every older bond paying a fixed rate becomes worth less.

One word, 2 meaningsIn this chapter, liquidity means how much spare cash the banking system has. Chapter 8 uses the same word for something else: how easily you can sell a bond.

3Who lends the money

If yields are set by lenders and borrowers, the first question is: who are the lenders? Who actually lends money to the Government of India?

Ravi would say he did, with his one bond. He is right, but he is a tiny part of it. At the end of September 2025 the government owed about ₹121 lakh crore through its long term bonds. RBI publishes exactly who lent it.

Look closely and you will find Ravi in that chart 3 more times, without his knowing.

His salary account is in the first bar. RBI makes every bank keep 18 percent of its deposits in safe assets it can sell quickly, and in practice that means government bonds. The rule is called the statutory liquidity ratio. So part of the money in Ravi's bank account is lent to the government, whether he meant it or not.

His life insurance is in the second bar. Insurers have made promises that run for decades. They need bonds that last as long as those promises, so they are the biggest buyers of the longest bonds.

His provident fund is in the fourth. The deduction on his payslip ends up, in part, as government bonds held by a provident fund.

The RBI holds about 13.5 percent, and that share is a choice, as section 5 explains. Foreign investors, the group the headlines watch most, hold about 3 percent.

There is no bar for people like Ravi buying bonds directly. Almost all of India lends to its government through someone else.

The exact shares shift a little every quarter. RBI's monthly Bulletin publishes them in a table called Ownership Pattern of Central and State Governments Securities, so you can check the picture for any date.

The lenders are mostly banks and long term savers, holding your deposits, premiums and provident fund. When their appetite changes, the price of every bond changes with it.

4Who borrows it

Now the other side of the market. Picture a large family that borrows from its neighbours every single Friday. The family is honest and always pays back. But it needs a lot, every week, and it tells the whole street in advance how much it will ask for.

That family is the government. Twice a year it publishes a calendar of what it will borrow, week by week, and every quarter the states publish theirs. The amounts are enormous. For the second half of 2026‑27, for example, the government planned to borrow ₹7,86,000 crore in weekly auctions of ₹33,000 to ₹36,000 crore. The states planned another ₹3,60,820 crore in a single quarter.

Here is one of those Fridays. On 25th Sep 2026 the RBI, which runs the auctions for the government, sold ₹34,000 crore of a 10 year bond. It received 402 bids worth ₹83,880 crore. It accepted 143 of them and set the price at ₹98.58, a yield of 7.1450 percent. Lenders who asked for more than that got nothing. That auction, not a committee meeting, set the 10 year yield that week.

Now imagine the family suddenly announces it will need far more next year. The neighbours will lend, but they will ask for more interest. That is exactly what happened on 1st Feb 2022. The Budget said the government would borrow ₹14.95 lakh crore in the coming year, more than lenders expected, and yields jumped the same day.

3 days later, the RBI held an auction of more of Ravi's bond. Lenders now wanted a higher yield than the government was willing to pay. So the RBI rejected every single bid and walked away. It was one more step in the slide on Ravi's chart.

Borrowing is scheduled and public. When the government needs more than lenders expect, yields rise, with no change in the RBI's rate at all.

5The RBI's cash counter

So where does the RBI fit in? Think of it as a cash counter that never closes, sitting in the middle of all the banks.

Every evening, some banks have spare cash and some are short. A bank with spare cash can leave it at the RBI's counter overnight and earn a small, fixed rate. A bank that is short can borrow at the counter overnight, at a slightly higher fixed rate. Between those 2 is the rate you hear on the news.

The middle rate is the repo rate, the one the 6 members of the Monetary Policy Committee vote on. The floor is called the SDF rate and the ceiling the MSF rate. Since April 2022 each has sat 0.25 of a point from the repo rate, so when the repo rate moves, the whole band moves with it. It was not always this way, as the next section shows.

Why does the counter matter? Because no bank will lend its spare cash to another bank for less than the counter pays, and no bank will pay another bank more than the counter charges. So the rate banks charge each other overnight stays inside the band. On 28th Sep 2026, for example, banks left ₹1,11,711 crore at the RBI overnight at 5.24 percent, when the repo rate was 5.25. Nobody forced them. That was simply what spare cash was worth that night.

Notice the word overnight. Every rate the committee sets is a one night rate. Ravi's bond is a 14 year loan. Keep that gap in mind. It is the whole secret of this chapter.

The RBI has 2 more tools, and neither needs a meeting.

It can pour cash in, or drain it out. Think of the banking system as a water tank. When the tank runs low, the RBI buys government bonds from banks and pays them cash. When the tank is too full, it sells bonds and takes cash back. These are called open market operations. In early 2025, with cash short, the RBI bought about ₹1.7 lakh crore of bonds in a few weeks. In September 2026, with cash plentiful, it sold ₹1,00,000 crore. Selling drains cash and also adds more bonds for lenders to absorb. Both push yields up.

It can lock cash away. Banks must keep a slice of their deposits with the RBI, earning nothing. This is the cash reserve ratio. In 2025, for example, the RBI cut it by a full percentage point, to 3 percent, which freed that money for banks to lend or to buy bonds with.

The repo rate gets the headlines. But it is an overnight rate, and the RBI's other tools move just as much money, on days when nobody is watching.

6The counter has been rebuilt many times

The cash counter can look like a law of nature. It is not. It is a set of choices, and the people in charge have changed those choices again and again.

Think of cricket. The game is well over a century old, but the rules keep changing. Powerplays, free hits and the review system are all recent. A match still ends with one side winning, but it is not played the way it was 30 years ago. The way India sets its interest rates is the same. The goal has stayed roughly the same. The rules, the tools and even the people who decide have changed.

So who decides what? It helps to split it 3 ways.

• The goal is set by the government, in law. The 4 percent target is reviewed every 5 years. It was kept in 2021 and again in March 2026.
• The rate is set by the committee's vote, every 2 months or so.
• The tools, the counter, the width of the band, which windows are open, are designed by the RBI. Changes usually follow a report by an internal working group and are announced by the Governor.

That last point is the one worth remembering. The repo rate, the SDF and the MSF are the tools of this period, not permanent features. Each one was added for a reason, and each can be replaced the same way.

If you read this years from now and the names have changed, the idea will not have. The RBI sets the price of money for one night. Lenders set the price of money for 10 years, by guessing all the nights in between.

7The cut that pushed yields up

Back to the first reader. On 6th Jun 2025 the RBI cut its rate by 0.5 of a point, more than most people expected. And yet his gilt fund, a fund that holds long government bonds, fell. To see why, think about a school.

Your child's school announces that fees will be cut this year. Good news. Then the principal adds one line: "This is the last cut. Do not expect any more." If you had planned your budget on cuts for the next few years, that one line changes your plans more than this year's cut does.

That is what happened. One paragraph after the cut, the committee wrote this:

A long bond is a loan for 10 or 15 years, so its price depends on every rate people expect over those years, not on tonight's. Lenders had been counting on more cuts. The committee had just said there might not be any. So long term yields went up on the very day of a bigger cut than expected. RBI's own bulletin recorded it:

Figure 1

The 10 year yield was 6.25 percent the day before the cut and 6.38 percent 2 weeks later. Short term rates fell, as you would expect. Long term rates rose.

That split is the most useful idea in this chapter. The short end follows the RBI. The long end follows the future. A 3 month Treasury bill is like a string of 90 overnight loans, so it cannot stray far from the RBI's counter. A 15 year bond is a bet on 15 years of prices, borrowing and policy, and tonight's rate is only the first night of it.

The market does not trade the rate the RBI announces. It trades the rates it expects for years ahead, and one sentence about the future can outweigh a cut today.

8Why prices move before the RBI does

Now Ravi's puzzle, and the second reader's. Why do bond prices move when the RBI has not done anything?

Think about umbrellas. When the weather office says a heavy monsoon is coming next week, umbrella prices go up today. The shopkeeper does not wait for the rain. He prices in what he expects.

Lenders do the same. In late 2021 prices were rising, in India and around the world. Lenders could see that the RBI would have to raise rates sooner or later. They did not wait. They started asking for higher yields straight away, and that is what pushed Ravi's bond from ₹100 to ₹94.42 while the RBI's rate sat at 4 percent. When the RBI finally raised its rate on 4th May 2022, most of the fall had already happened.

It happens in almost every turn of the cycle. Here it is again, 4 years later, in the RBI's own auction results:

Through August and September 2026 the repo rate stayed at 5.25 percent. The 10 year bond's yield still climbed from 6.81 to 7.15 percent. Even the 3 month bill, which usually hugs the repo rate, rose to 5.52 percent by 30th Sep. When the committee did raise the rate on 7th Oct, it raised it to 5.50 percent: below where lenders had already taken the bill a week earlier.

What were lenders watching? The same things the committee watches, and it lists them in public. Before that 2026 hike they were oil prices, rates abroad, and above all inflation.

Inflation matters to a lender more than to almost anyone. Ravi's bond promises him ₹6.67 a year, in rupees, for 14 years. It does not promise what those rupees will buy. If prices rise faster, every one of those fixed payments is worth less. So when lenders expect faster inflation, they ask for a higher yield, and every older bond, like Ravi's, has to get cheaper to keep up.

The second reader asked the right question: "what is the gilt market anticipating?" The long end is a forecast, like the umbrella price. It moves when the forecast changes, and the forecast usually changes before the RBI does.

9How it reaches your home

Ravi owns one bond. But the same flow of money reaches his whole household, whether or not anyone else in it has heard of a bond.

New deposits can move without the RBI. In March 2026, with the repo rate unchanged, the average rate banks offered on new deposits jumped from 5.65 to 6.07 percent in a single month. The financial year was ending, banks were short of cash, and they paid up for it. Year ends are often like that. The water tank, not the committee, moved that rate.

PPF follows bond yields on paper. Since 2016 the government's formula has tied each small savings rate to the yield on a government bond of similar length, plus a little extra. But the formula is advice, not a rule. PPF, for example, was held at 7.1 percent from April 2020 through 2026, across years when the formula pointed lower and years when it pointed higher.

Debt funds show it fastest. A fund that holds long bonds moves like Ravi's bond, every single day. SEBI makes every debt fund print how much of this risk it can take, on a scale of 3 classes. Class I funds hold short loans and barely move. Class III funds can hold the longest bonds, and they move the most.

A change in the repo rate reaches a floating home loan within months and a debt fund the same day. It never reaches a deposit, or a bond, that you have already locked in and will hold to the end.

10How far a bond can fall

Ravi's bond fell almost 8 percent. Could he have known how far it might fall before he bought it? Yes, with one number.

Go back to the flat. A 2 year rental agreement at an old rent is a small problem: in 2 years you can reset it. A 15 year agreement is a big one. The longer you are locked in, the more a change in market rents hurts. Bonds are the same. The longer the bond, the further its price moves when yields change.

The number that measures this is called modified duration. Treat it as a multiplier. RBI's own guide to government bonds says it plainly:

Figure 2

Using it takes 3 steps.

Here is what that means in money, for a bond with a modified duration of 9, bought at ₹100:

It works the other way too. If yields fall by 1 point, the same bond rises by about 9 percent, to about ₹109.

Why 9, and not some other number? Roughly, it is how many years your money stays locked up in the bond, counting each payment by when it comes back. Go back to the flat. Being stuck with an old rent for 9 years hurts about 9 times as much as being stuck with it for 1 year. A bond with a modified duration of 2 barely notices a move that knocks 18 percent off a bond with 9.

Now Ravi's bond. On the day he bought it, its modified duration was about 9. Its yield then rose from 6.67 to 7.61 percent, a move of 0.94 of a point. Multiply: 9 × 0.94 is about 8.4 percent. The real fall, from ₹100 to ₹92.10, was 7.9 percent. Close enough to plan with. On big moves the rule slightly overstates the fall, so treat it as the careful estimate.

Here is the same idea across 5 real government bonds, each hit by the same one point rise in yields:

The bonds on offer when you read this will be different. The order will not. You never have to work duration out yourself, either. Most bond detail pages print it, and any spreadsheet will calculate it with its MDURATION function. What you have to do is find it and multiply.

Modified duration tells you, before you buy, roughly how much a bond's price moves for each point of change in yields. The longer the bond, the bigger the number.

11Ravi's choice

So, in May 2022, Ravi is looking at ₹92.10 on his screen. What should he do?

Go back to the flat one last time. Rents in the market went up, and your 15 year agreement now looks bad to a buyer. But if you were never planning to sell the flat, what has changed for you? Your tenant still pays ₹20,000 on the first of every month, exactly as agreed.

Ravi's bond is the same. It still pays ₹6.67 a year on every ₹100. And on 15th Dec 2035 the government will repay ₹100, not ₹92.10, to whoever holds it. If Ravi holds it to that day, he earns exactly the 6.67 percent he signed up for. The red number on his screen is only the price someone else would pay him today.

RBI tells small investors this in plain words:

This is why Ravi's first decision, back in 2021, was the clever one. He did not just buy a safe bond. He bought one that ends in the same month his daughter starts college. He matched the date of the bond to the date he needs the money. Because of that, he will never have to be a seller, and a seller is the only person a falling price can hurt.

Imagine instead that Ravi had needed the money in 2024. Then the price in between would have mattered a great deal, because he would have had to sell at whatever it was. That is the honest question to ask before buying any bond: will I need this money before the bond ends? If the answer is yes, buy a shorter bond. Chapter 9 covers the other kind of protection, interest rate futures.

And now the 3 puzzles from the start make sense. Ravi's bond fell while the RBI did nothing, because lenders priced in the hikes before they came. The first reader's fund fell after a cut, because the committee said the cuts were over. The 30 year yield rose without any RBI move, because the long end prices years of inflation and borrowing, and those expectations moved first. None of it could touch a bond held to the date its owner needs the money.

A fall in price is only a loss if you sell. Match the bond's end date to the date you need the money, and the number on the screen becomes something you can read and then ignore.

125 things to read on a policy day

Every 2 months the committee announces its decision, and the headline reports one number. Here is what actually moves bond prices, in the order it matters. Every figure in this chapter is a dated example; the last column says where to find today's.

And one thing to stop reading: the headline. "Rates are rising" almost never says which rate. The repo rate is overnight and set by a committee. Your bond's yield is set every day by lenders and borrowers. They usually move together. On the days they do not, it is the market telling you something.