US Fed rate cut
The US Federal Reserve cut rates by 25 bps on September 17, 2025, bringing the federal funds rate down to 4.00–4.25 per cent. This marked the first policy easing since December 2024, driven by signs of cooling economic activity, slower job creation, and a marginal rise in unemployment in the US. The Fed also signaled scope for two more cuts this year.
For emerging markets like India, rate differentials between local government bond yields and US treasury yields have an impact on capital flows. Theoretically, therefore the Fed’s rate cuts should widen rate differentials and create room for higher foreign inflows into emerging markets like India. However, in practice the flows depend on several factors including the economic prospects of the recipient country, the inflation outlook, currency outlook and valuations. On this score, with a weakening rupee and the tariff face-off yet to resolve, the tide is yet to turn for India. So far in September, FPIs have sold equities worth ₹13,450 crore, lower than the ₹17,740 crore withdrawn in August and ₹34,993 crore in July. On the debt side, FPIs continue to be net buyers, investing ₹12,339 crore this month after ₹14,640 crore in August and ₹11,811 crore in July.
India’s sovereign credit rating upgrade
Japanese credit rating agency Rating and Investment Information, Inc. (R&I) upgraded India’s long-term sovereign rating to ‘BBB+’ from ‘BBB’ on September 19, while retaining a “Stable” outlook. The upgrade reflects India’s strong growth prospects, fiscal consolidation progress, and government-led reforms. The Japanese agency’s upgrade is the third rating upgrade for India in 2025, following S&P’s move to ‘BBB’ in August and Morningstar DBRS’s upgrade to ‘BBB’ in May.
While the BBB rating is still only borderline investment grade, this is still an important signal that the Indian government’s debt metrics are improving. This is in contrast to the worsening debt condition of advanced economies such as the US which are running debt-GDP ratios of over 120 per cent with no signs of moderation.
Thankfully for India, the inclusion of Indian gilts in global indices, following the JPMorgan Global Index addition, has ensured that the bond market has continued to attract foreign inflows through the passive route. In September 2025, Indian government bonds will also join the FTSE Emerging Markets Government Bond Index (EMGBI), albeit at a smaller scale. HSBC AMC report highlighted that rising passive and active inflows from global investors will improve demand, deepen the bond market, and compress risk premiums over time.
RBI maintains ample liquidity
Liquidity conditions remained abundant in September, supported by the recent Cash Reserve Ratio (CRR) cut. The average banking system surplus stood at ₹2.2 trillion. The RBI actively managed flows through VRR/VRRR operations, offsetting tax-related outflows and government spending, thereby ensuring smooth market functioning.
The phased CRR cut of 100 basis points, is being implemented in four equal tranches of 25 bps each, beginning September 6. The move is expected to inject nearly ₹2.5 lakh crore of primary liquidity into the system by December 2025, supporting smoother monetary transmission.
Since February, the RBI has cut the repo rate by a cumulative 100 basis points to 5.5 per cent. The upcoming MPC meeting is expected to see a continued pause like August, but MPC commentary will be keenly watched for cues to future direction of policy rates. Inflation seems to be well under check with CPI inflation at 2.1 per cent in August from 1.6 per cent in July. India’s 10-year benchmark G-sec yield eased about 10 bps to 6.5 per cent over the past month. In August, yields had risen on concerns about front-loaded policy moves, fears that CRR cuts limited future easing space, and worries that GST restructuring might increase borrowing requirements. These concerns faded after it was clarified that GST changes would not necessitate additional government borrowing.
Corporate bond yields followed a similar trend, with 10-year AAA-rated securities slipping to 7.25 per cent from 7.36 per cent. Short-term rates softened as well, with three-month certificate of deposit and commercial paper yields falling by 10 bps to 5.88 per cent and 5.9 per cent, respectively.
H2 borrowing programme
The RBI released its second-half borrowing programme for FY26, targeting ₹6.77 lakh crore through dated securities. Gross borrowings for the year stand at ₹14.72 lakh crore, slightly below the budgeted ₹14.82 lakh crore — a relief compared to earlier fears of overshooting.
Key adjustments include reducing long-term bond supply by around 5 per cent while increasing shorter-dated issuances, easing concerns of excess supply in longer maturities. This is again bullish for Indian government bonds.
Published on September 27, 2025