<p>A CFO looking at interest rates may justifiably be confused by three numbers that appear to be telling the same story but are not. The repo rate is the rate at which the Reserve Bank of India provides short term funds to banks against securities. The reverse repo rate is the rate at which the RBI absorbs surplus funds from banks. In practice, since 2022 the Standing Deposit Facility has replaced the fixed reverse repo as the floor of the RBI’s liquidity corridor. These are policy rates and are set or managed by the central bank and tell us what the RBI wants short term money to cost.</p><p>A bond yield is different. The yield on the ten year Government of India bond is set in the market, by buyers and sellers deciding what return they require to lend to the sovereign for a decade. It therefore contains far more than today’s repo rate. It reflects expectations about inflation, future RBI policy, government borrowing, fiscal deficits, the rupee, oil prices, global interest rates and the extra return investors demand for tying up money for a long period. That distinction matters. While the repo rate is the RBI speaking, the bond yield, on the other hand, is the market replying. Over the last three years, that conversation has been fairly revealing. Through much of 2023, the ten year government yield hovered around 7.1 to 7.3 per cent. It then fell sharply during 2024, ending the year at about 6.76 per cent. Fiscal restraint helped, as did lower government borrowing and India’s inclusion in JPMorgan’s emerging market bond index, which brought substantial foreign inflows.</p><p>The decline continued in 2025, but only modestly. The ten year yield ended the year near 6.59 per cent even though the RBI cut the repo rate by a cumulative 125 basis points. That was an important lesson. Central banks can influence the short end of the market, but they cannot dictate long term yields. Supply of government debt, the rupee, foreign flows and investor appetite matter too. In 2026 the message has changed again. Yields fell to around 6.7 per cent by mid-year as foreign money returned, but have since climbed back to roughly 7 per cent. Oil above USD 100, higher domestic inflation, a weaker rupee and sharply higher US Treasury yields have all mattered. So has the RBI’s decision to drain surplus liquidity by selling government bonds. The market has effectively declared that inflation and funding risks have risen, even though the repo rate remains 5.25 per cent.</p><p>This is why bond yields are such a useful test of confidence in fiscal and monetary policy. A government can announce a lower deficit target and a central bank can promise price stability, but the bond market places a price on those promises every day. If investors believe inflation will stay controlled, deficits will fall and the currency will remain reasonably stable, yields tend to soften. If they doubt any of those things, yields rise. For CFOs, three numbers should therefore be read together. The repo rate tells you the direction of RBI policy and helps frame short term bank funding costs. The ten year government yield tells you how the market prices longer term macroeconomic risk. The spread between your company’s borrowing rate and the comparable government bond yield tells you what investors think about your own credit risk.</p><p>And equities? Well, there is a relationship but not a mechanical one. Higher bond yields can hurt shares because they raise discount rates, increase financing costs and make bonds more attractive relative to equities. Falling yields can therefore support stocks. But if yields fall because investors fear recession, bonds may rally while equities fall. Conversely, strong growth can lift both equities and yields.</p><p>The useful rule is that equity markets tell you what investors think companies may earn. Bond markets tell you what investors think money, inflation and risk should cost. A sensible CFO watches both.</p>
<p>A CFO looking at interest rates may justifiably be confused by three numbers that appear to be telling the same story but are not. The repo rate is the rate at which the Reserve Bank of India provides short term funds to banks against securities. The reverse repo rate is the rate at which the RBI absorbs surplus funds from banks. In practice, since 2022 the Standing Deposit Facility has replaced the fixed reverse repo as the floor of the RBI’s liquidity corridor. These are policy rates and are set or managed by the central bank and tell us what the RBI wants short term money to cost.</p><p>A bond yield is different. The yield on the ten year Government of India bond is set in the market, by buyers and sellers deciding what return they require to lend to the sovereign for a decade. It therefore contains far more than today’s repo rate. It reflects expectations about inflation, future RBI policy, government borrowing, fiscal deficits, the rupee, oil prices, global interest rates and the extra return investors demand for tying up money for a long period. That distinction matters. While the repo rate is the RBI speaking, the bond yield, on the other hand, is the market replying. Over the last three years, that conversation has been fairly revealing. Through much of 2023, the ten year government yield hovered around 7.1 to 7.3 per cent. It then fell sharply during 2024, ending the year at about 6.76 per cent. Fiscal restraint helped, as did lower government borrowing and India’s inclusion in JPMorgan’s emerging market bond index, which brought substantial foreign inflows.</p><p>The decline continued in 2025, but only modestly. The ten year yield ended the year near 6.59 per cent even though the RBI cut the repo rate by a cumulative 125 basis points. That was an important lesson. Central banks can influence the short end of the market, but they cannot dictate long term yields. Supply of government debt, the rupee, foreign flows and investor appetite matter too. In 2026 the message has changed again. Yields fell to around 6.7 per cent by mid-year as foreign money returned, but have since climbed back to roughly 7 per cent. Oil above USD 100, higher domestic inflation, a weaker rupee and sharply higher US Treasury yields have all mattered. So has the RBI’s decision to drain surplus liquidity by selling government bonds. The market has effectively declared that inflation and funding risks have risen, even though the repo rate remains 5.25 per cent.</p><p>This is why bond yields are such a useful test of confidence in fiscal and monetary policy. A government can announce a lower deficit target and a central bank can promise price stability, but the bond market places a price on those promises every day. If investors believe inflation will stay controlled, deficits will fall and the currency will remain reasonably stable, yields tend to soften. If they doubt any of those things, yields rise. For CFOs, three numbers should therefore be read together. The repo rate tells you the direction of RBI policy and helps frame short term bank funding costs. The ten year government yield tells you how the market prices longer term macroeconomic risk. The spread between your company’s borrowing rate and the comparable government bond yield tells you what investors think about your own credit risk.</p><p>And equities? Well, there is a relationship but not a mechanical one. Higher bond yields can hurt shares because they raise discount rates, increase financing costs and make bonds more attractive relative to equities. Falling yields can therefore support stocks. But if yields fall because investors fear recession, bonds may rally while equities fall. Conversely, strong growth can lift both equities and yields.</p><p>The useful rule is that equity markets tell you what investors think companies may earn. Bond markets tell you what investors think money, inflation and risk should cost. A sensible CFO watches both.</p>
