Clipped from: https://www.thehindubusinessline.com/opinion/interest-rates-unlikely-to-dip-in-the-medium-term/article70408272.ece
This is due to a combination of factors — tariff uncertainty, weakening currency, high global rates
Uncertain times: Rate dynamics | Photo Credit: iStockphoto
The Reserve Bank of India began its monetary easing cycle in February 2025, with policy rates cut by 125 basis points by December 2025. Meanwhile, the 10-year G-sec yield has decreased by only 17 basis points during the same period, indicating a limited and gradual pass-through of interest rate reductions at the longer end of the yield curve.
Likewise, the US Federal Reserve has reduced its policy rates by 175 basis points over the last 15 months. Surprisingly, the 10-year Treasury yields have increased by 38 basis points. This shows a clear disconnect between central banks’ expectations and the bond market’s actual behaviour.
Why is this happening? Policy rates mirror central banks’ outlook and their informed assessment of the economy’s interest rates. Nevertheless, actual outcomes depend on supply-demand dynamics, anticipated inflation, tariff disputes, geopolitical issues, and overall macroeconomic uncertainty, which we have enough of. Central banks are attempting to drive growth (in the case of India) and employment (in the case of the US), but the bond market is indicating a harsher truth of persistently high long-term rates.
Sovereign bond markets
A key factor influencing long-term yields is the demand and supply dynamics in sovereign bond markets. Since many major economies face high fiscal deficits and substantial debt levels, the demand for future borrowing stays elevated. Consequently, increased net issuance of bonds pushes up the term premium, resulting in higher interest rates.
Specifically for India, despite an improving fiscal position, low inflation, strong GDP growth, and long-term interest rates remain elevated. This can be attributed to tariff uncertainty, a weakening currency, and globally high interest rates.
What does it mean for us? It essentially means that despite the RBI’s actions, the long-term borrowing and lending rates remain high. High long-term bond yields imply high expected bank deposit rates. High bank deposit rates mean that banks’ cost of funds remains high, and thus they are unable to reduce their lending rates. In fact, it adversely affects banks. Their benchmark-linked lending rates reduce in line with the lower repo rate, even though their cost of deposits remains high. This impacts banks’ margins.
Macroeconomic risks
Beyond demand, supply dynamics, and domestic factors, global macroeconomic risks have a far-reaching impact. Trade and tariff-related uncertainties have added another layer of complexity. Ongoing tariff disputes, supply-chain realignments, and uncertainty around US trade policy, including sector-specific tariffs and strategic re-shoring incentives, continue to influence inflation expectations and global capital flows.
For India, uncertainty regarding US-India trade relations, export competitiveness, and potential retaliatory tariffs affects currency stability and foreign investor sentiment. For banks, these uncertainties translate into a higher risk premium. Currency volatility raises hedging costs, while geopolitical risks reduce appetite for long-duration assets, keeping bond yields firm even in easing cycles.
While central banks can guide short-term rates, long-term yields remain largely driven by fiscal pressures, inflation expectations, and geopolitical uncertainties. Globally, persistent inflation, heavy sovereign borrowing, and volatile capital flows continue to hold long-term yields high. In my view, none of these risks is likely to abate in the near term; hence, long-term interest rates in India and globally are unlikely to decline in the near future.
The writer is Chief Rating Officer & ED, CareEdge Ratings
Published on December 18, 2025
aniltikotekar4sme.com 