10-year G-Sec yield climbs to 6.85% in July: Here's what pushed bond yields higher

India's government bond yields moved higher across the yield curve in July, with the benchmark 10-year government security (G-Sec) yield rising 17 basis points to 6.85%, as higher crude oil prices, tight banking system liquidity and the postponement of India's inclusion in Bloomberg's Emerging Market Index weighed on investor sentiment, according to Tata Mutual Fund's Fixed Income Observer for August 2026.

The report noted that yields increased across both long-term and money market segments between June and July, reflecting a combination of domestic liquidity pressures and global macroeconomic developments.

Crude oil, index delay weigh on bonds

According to Tata Mutual Fund, one of the key factors behind the rise in long-term yields was the sharp increase in Brent crude prices, which climbed from $77 per barrel to $92 per barrel during the month.

The surge in oil prices heightened inflation concerns, prompting investors to demand higher yields on government securities. Bond market sentiment was also affected after Bloomberg deferred India's inclusion in its Emerging Market Index, delaying anticipated foreign investment into domestic bonds.

MUST READ: Gold may rally to ₹1.48 lakh in 1-2 weeks despite correction: Vandana Bharti of SMC Global explains why

Despite these headwinds, the fund house believes the impact of the index delay is likely to be temporary, supported by strong domestic demand for government securities.

Liquidity tightness lifts short-term rates

Short-term yields also witnessed a broad-based increase as banks grappled with tighter liquidity conditions.

The report attributed the move to robust credit demand, higher issuance of certificates of deposit (CDs) and slower deposit mobilisation. Bank credit expanded 17.7% year-on-year, significantly outpacing 12.7% growth in deposits, resulting in funding pressures across the banking system. Liquidity also remained slightly in deficit due to strong credit growth and RBI intervention.

As a result, money market rates rose sharply. The 3-month CD yield increased by 36 basis points to 6.80%, while the 12-month CD yield rose to 7.10%. Treasury bill yields also moved higher across maturities.

The report further noted that mutual funds have seen weaker inflows into short-duration products, reducing demand for money market instruments and contributing to elevated short-term interest rates.

ALSO READ: These six Sovereign Gold Bond series become eligible for early redemption in August: Check dates, process

Domestic demand offers support

While yields have moved higher, Tata Mutual Fund expects strong domestic demand to limit further pressure on the bond market.

Banks continue to maintain Statutory Liquidity Ratio (SLR) holdings of around 24.2% and remain active buyers of government securities in both primary auctions and the secondary market, particularly in the short- to medium-term segment of up to seven years.

The report also highlighted expected inflows under the RBI's Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme, saying they could improve liquidity in the banking system and support additional purchases of government securities, helping absorb upward pressure on yields.

Overall, the report suggests that while geopolitical developments, elevated crude oil prices and funding pressures drove yields higher in July, robust domestic demand for government bonds and improving liquidity conditions could provide stability to the fixed-income market in the months ahead.

MUST READ: The ₹2.5 crore mistake most investors make isn't choosing the wrong stock — it's starting 10 years late