Indian Government Bond Yields Hit Highest in One Year: Should Equity Investors Worry Now?

As markets are swinging in India, Indian bond yields are making news for being the highest in the last year. As early as February 2026, government bond yields in India showed a benchmark 10-year government bond yield in India of 6.76%, and this is a sign of a big increase. Since this increase showed a big change, people started to raise concerns about the equity markets' risk. 

Changes in the investing behaviour of the people who have seen greater returns from equities in the past 2 to 3 years indicate there are imperative changes to the market. Should we panic about this sudden change, or is this an interesting observation?

In this blog, we will elaborate on why there is an increase in Indian bond yields, examine the bond yield effect on equities and judge if there is a need for a change in policy for the people. Furthermore, we will analyse interest rates in India and the budget market reaction to explain the current situation. This will help people to navigate the current situation in the market more effectively.

What are Bond Yields and Why Do They Matter?

To understand what is happening now, let us explain the basics first. Bond yields are returns from an investor on a bond. This is essentially the interest rate the bond issuer (in this case, the government) pays. When we refer to government bond yields in India, we refer to the yields on Government Securities (G-Secs), which are considered the safest form of investment since they are backed by the government.

There's an inverse relationship between yields and bond prices: When yields go up, prices go down (and vice versa). This relationship is fundamental as it determines the overall economy's borrowing costs. High yields mean the government pays more to borrow, which consequently leads to corporates and individuals paying more through higher interest rates in India.

The past few months have seen Indian bond yields rise. The 10-year benchmark yield, the most important yield, reached 6.78% soon after the Union Budget 2026 announcement, the highest since January 2025. It closed on 09 February 2026 at 6.76%, an increase of 0.05 percentage points compared to the previous day. This is a 0.16-point increase as a result of a combination of factors from the domestic and international markets. 

With the rise in the government bond yields in India, equity investors have a lot to consider. Bonds and stocks fight for the attention of investors, and when bond yields go up, this can mean greater market risk for stocks. Additionally, a rise in bond yields can show investors that the economy is going through changes or that there are inflationary impacts.

What is Causing the Sliding Yields of Government Bonds in India in 2026?

The increase of government bond yields in India is connected to numerous events occurring in the surrounding market.

The first of these events is the budget market reaction. The government of India's Union budget for 2026, presented by the Finance Minister Nirmala Sitharaman, stated there is a record gross borrowing of 17.2 trillion rupees in FY27, which is a staggering 18% increase from last year. 

This unexpected outcome increased the immediate sell-off in the bond market and the benchmark yield increased to 6.78%, up to 8 basis points (bps) from the day of the budget. Investors fear increased market flooding during the budget. There is a fiscal deficit of 4.3% and a net borrowing of 11.7 lakh crore, and this is optimal, but the gross borrowing is a lot and can drastically increase the bond yields.

The Reserve Bank of India (RBI) keeps its repo rate at 5.25%, making the February 2026 review hold policy even more challenging. The RBI didn't announce fresh liquidity measures. Instead, traders predicted open market operations (OMOs) to absorb excess supply. The RBI also noted the inflation measures for FY26 and FY27, and revised the forecast. Market conditions reflect overall caution and inflation.

The secondary state bond issuance market is cash (around 486 billion rupees), and pressure is increasing the supply. Across the world economy, tension is a cause of increased yield; supply and demand for bond yield to inflation. Worldwide value in the economy is coming from domestically strong inflation. Increased expectations have a role in the economy. Yield reflects the demand for goods.

The pause in US inflation and globally across the world is fiscal in the economy; supply and bond in India.

Bond Yields and Equity Market: A Two-Sided Sword

There is no other way around this. The impact of bond yields on stocks is direct. Rising bond yields affect the stock market and India is no different.  

Simply put, the yields on Indian bonds determine the cost of borrowing money for companies. If corporates have to pay more to service a loan, their profit margins are affected more so in the real estate, infrastructure, and manufacturing sectors that are highly leveraged. This reduces the earnings growth potential of companies in the stock market. Therefore, stock market valuations reduce and equity market risk increases.  

When yields rise, bonds become a more attractive and safer investment option compared to stocks. This leads to a disinvestment in stocks and a direct investment in bonds, especially for FIIs. This is exactly what is happening in India. Previous episodes of rising yields in the US bond market have led to a decrease in the investment in Indian stocks and an increase inthe investment in US bonds. 

The negative shift in the Indian stock market and a depreciating Rupee increase the risks for companies that are reliant on imports.

The budget market reaction made this even worse. After the budget, stock markets ignored the increased borrowing, leading to volatility on the Nifty. Long-duration bond funds fell about 0.75% in one day, while other bond funds fell even more. This serves to show that the market is uncomfortable. Experts say that if high yields persist, the yield curve could mature, making short-term investments more favourable, thereby pulling money out of growth stocks.

On the other hand, there is some positive news. With trade agreements made with the US and the EU, the growth of India's economy for FY26 is 7.4%. Earlier in the cycle, interest rates in India(RBI cut 125 bps in 2025) have supported equities. If yields are steady, stocks within the market could do well. Other markets, including banking, would benefit from larger net interest margins during a period of rising rates.

Should Equity Investors Worry About Rising Bond Yields?

Equity investors are mainly worried. This largely depends on the timeframe and the amount of risk one is willing to take. Short-term impacts indicate a level of concern, even if the RBI maintains its neutral stance. Ongoing borrowing pressures will keep yields above 6.71%-6.80% this week as selling continues. 

Higher inflation (forecasts indicate an increase in FY27) will lead to higher yields and lower stock market investments. A record high in the government bond yields in India signals equity market risk.

Positive impacts on India’s economy are the result of a strong Buch 2026. India’s RBI will increase OMOs and FX swaps. This will keep yields lower than they increase. Indian equities historically rebound from high yield spikes due to strong growth narratives.

A long-term investor can look for opportunities by allocating money in hybrid funds or defensive stocks like consumer goods or IT. These stocks are less reactive to interest rate changes in India. Watch out for changes in bond yields. If they even start to peak and decline, there is a buying opportunity for equities.

Investment Strategies with Elevated Bond Yields

Here are a few strategies to consider to reduce uncertainty:

• Portfolio Diversification: Take a 20-30% position in bonds or debt funds to ensure your portfolio has a stable element. Bond yields are expected to increase in the near future, and if they do, short-duration funds will be less impacted by price declines.
• Quality Equity: Pick equities of companies whose debt levels are low and cash flow is high. These companies will be less impacted by high borrowing costs.
• Follow the RBI: Watch out for the next statement by the RBI, as it will provide information on future interest rate expectations in India. If interest rates are expected to be lowered, equities will be expected to do well.
• From the US: Look at the yields in the US, as they will affect how money is flowing out of India.
• In the long run: Because of India's addition to the global bond indices, there has been investment into India from abroad, and this is expected to bring stability to bond yields in the future.

Conclusion

Indian bond yields have recently reached their highest levels in the past year, further exemplifying the intertwined nature of bonds and equities. Though this rise in yields can introduce risks to the equity markets, especially driven by budget market reactions, RBI strategies, and international patterns, it does not mean market disaster. For investors in equities, this should trigger a reassessment of their portfolios, rather than panic selling.

In conclusion, even though India's government bond yields are higher than before and India’s equity markets are likely to be impacted in the short run, India’s growth story continues to be propelled by favourable GDP estimates and growth-oriented policy reforms. By tracking bond yields and interest rate patterns, investors are able to identify opportunities. Informed decision-making will always come out on top in the long run.

DISCLAIMER: This blog is NOT any buy or sell recommendation. No investment or trading advice is given. The content is purely for educational and information purposes only. Always consult your eligible financial advisor for investment-related decisions.