Interest rate on 10-year government securities surges beyond 6.5% after a decade
The Reserve Bank of India (RBI) has indicated a potential delay in the next interest rate cut, as the wait may have gotten longer due to changes in the monetary policy stance and the impact of previous rate cuts. This announcement comes amidst a challenging economic environment, with the US imposing steep tariffs on India's exports to the world's largest economy.
On Wednesday, the 10-year benchmark Government Security (G-Sec) yield breached the 6.5% mark for the first time after its issuance in May 2025. The RBI intervened in the G-Sec market when the yield of the 6.33% GS 2035 reached the 6.51-6.52% level, aiming to reduce the yield. However, the RBI's intervention did not significantly lower the yield, as the 6.33% GS 2035 closed a shade lower at 6.48% on the day.
The US tariffs are expected to have a direct impact of 30 to 50 basis points on GDP growth, according to Dwijendra Srivastava, Chief Investment Officer - Fixed Income, Sundaram AMC. There will also be an indirect impact, he believes. Srivastava predicts a hiatus on rate cuts for approximately 12 to 18 months due to uncertainty around the US' tariffs and their implications for the economy.
The rise in G-Sec yield came amidst a dip in net direct tax collection in the fiscal year, leading to speculation about potential increased government borrowing in FY26. The exact figures for direct tax collection in FY26 are not provided, but any shortfall in revenues could necessitate increased borrowing to meet expenditure commitments.
Lower net direct tax collection, the impact of US tariffs on Indian exports, and global trade uncertainties are all factors that could contribute to increased government borrowing in FY26. Private capital expenditure for FY26 is also projected to be lower than in FY25, which could slow down economic growth and increase the need for government intervention through borrowing.
Additionally, India's interest bill is projected to reach ₹12.76 trillion in FY26, nearly tripling over the past decade, which puts additional pressure on government finances and could lead to further borrowing to manage these expenses.
Retail inflation in July 2025 reached an eight-year low of 1.55%, while core inflation remains sticky at around 4% levels. The cumulative 100 basis points (bps) repo rate cut during the February-June 2025 period is working its way through the economy, as per RBI Governor Sanjay Malhotra's comments.
This article was published on August 13, 2025. It is important to note that net direct tax collection fell 3.95% year-o-year (y-o-y) this fiscal till August 11, to ₹6.64 lakh crore, primarily due to higher refunds.
In conclusion, the RBI's wait for the next rate cut may have gotten longer, as the economy faces challenges from US tariffs, lower direct tax collections, and global trade uncertainties. These factors could lead to increased government borrowing in FY26, putting pressure on the nation's finances and interest bill.
- The potential delay in the next interest rate cut by the Reserve Bank of India (RBI) could be due to changes in the monetary policy stance, the impact of previous rate cuts, and the challenging economic environment that includes factors like the US imposing steep tariffs on India's exports.
- Dwijendra Srivastava, Chief Investment Officer - Fixed Income, Sundaram AMC, predicted a hiatus on rate cuts for approximately 12 to 18 months due to uncertainty around the US' tariffs and their implications for the economy.
- The rise in G-Sec yield, lower net direct tax collection, the impact of US tariffs on Indian exports, and global trade uncertainties are potential factors contributing to increased government borrowing in FY26.
- Private capital expenditure for FY26 is projected to be lower than in FY25, which could slow down economic growth and increase the need for government intervention through borrowing.
- The RBI's intervention in the G-Sec market did not significantly lower the yield, and increased government borrowing to meet expenditure commitments, along with a rising interest bill, could put additional pressure on government finances.
