New Delhi, June 2026: India’s debt markets witnessed a broad-based rise in both short-term and long-term yields during May 2026, reflecting tightening liquidity conditions, strong credit demand, and sustained pressure on the banking system, according to the latest Fixed Income Observer report.
The report highlighted that money market rates rose sharply over the month, with Certificate of Deposit (CD) yields climbing across maturities. The 3-month CD yield increased by 78 basis points (bps) to 7.53%, while the 6-month CD yield surged by 88 bps to 7.70%. Similarly, 12-month CD yields rose 56 bps to 7.83%, indicating heightened funding costs in the short-term debt market. Treasury Bill (T-Bill) yields also moved upward, though at a relatively moderate pace.
According to the report, the rise in short-term rates was primarily driven by liquidity drying up in the banking system and mutual fund selling to meet redemption pressures. Corporate working capital requirements also contributed to increased demand for funds, putting additional strain on liquidity. Banking system liquidity declined significantly from ₹2.83 lakh crore to ₹1.14 lakh crore during the month, largely due to the Reserve Bank of India’s interventions in the foreign exchange market to stabilize the rupee.
The government securities (G-Sec) market also recorded higher yields across the curve. Yields on 1-year and 3-year G-Secs rose by 12 bps each to 6.56%, while the 5-year benchmark increased by 21 bps to 6.83%. The 10-year G-Sec yield edged up 9 bps to 7.02%. The report noted that the upward movement in the long end of the yield curve was largely influenced by the sharp rise in short-term yields.
Corporate bond yields displayed a mixed trend. While shorter-tenure AAA PSU bond yields moved higher, yields in the 3- to 7-year segment softened marginally. Consequently, spreads widened at the shorter end but narrowed across the 3- to 10-year maturity segment as government bond yields rose more sharply than corporate bond yields. The report observed that the corporate bond yield curve has become inverted, reflecting market expectations of continued liquidity tightness and potential interest rate hikes in the near term.
Market analysts suggest that strong credit growth—recorded at 16% year-on-year—combined with slower deposit growth of 12% has further intensified funding pressures. This mismatch between credit demand and deposit mobilization continues to weigh on liquidity conditions and may keep yields elevated in the coming months.
The report concludes that both the money market and long-term debt market remain sensitive to liquidity developments, RBI actions, and evolving interest rate expectations, making fixed-income investors increasingly cautious about duration exposure in the current environment.