The Reserve Bank of India (RBI) chose to keep the repo rate unchanged at 5.25% in its latest monetary policy review while retaining its neutral policy stance. However, the central bank signaled growing inflationary concerns by revising its FY27 CPI inflation forecast upward to 5.1% from the 4.4% projected in April 2026. At the same time, GDP growth expectations were trimmed to 6.6%, down from 6.9%.

Speaking about repo rate, Murthy Nagarajan, Head – Fixed Income at Tata Asset Management, said that the upward revision in inflation suggests that the possibility of future rate hikes cannot be ruled out. Nevertheless, the bond market appears to have already priced in this risk, with investors factoring in as many as three potential rate hikes over the coming months.

As a result, benchmark 10-year government bond yields have remained close to the 7% mark, trading in a narrow range of 6.96% to 6.99%. Market participants had largely anticipated that the RBI would refrain from raising rates in this policy meeting, keeping bond yields relatively stable.

Looking ahead, Nagarajan expects the bond market to remain range-bound, with the 10-year yield hovering around 7%. The key risk to this outlook is crude oil. A sustained rise in global crude prices above $100 per barrel could intensify inflationary pressures, potentially forcing the RBI to tighten monetary policy more aggressively and causing bond yields to move higher.

For now, the bond market appears largely comfortable with the RBI’s decision to hold rates steady, as the outcome was broadly in line with market expectations. Investors are weighing the central bank’s higher inflation projections against signs of a gradual moderation in economic growth, leading to a relatively balanced outlook for interest rates. While inflation remains a key concern and could warrant tighter monetary policy in the future, the softer growth forecast suggests that the RBI may not be in a hurry to raise rates aggressively.

As a result, bond yields have remained stable, with market participants adopting a cautious wait-and-watch approach. Going forward, developments in crude oil prices, domestic inflation trends, and global economic conditions are likely to play a crucial role in shaping bond market sentiment and the trajectory of interest rates.