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Below the Perspective on Bond market dislocation – Signal or distortion? by Ms. Madhavi Arora, Chief Economist, Emkay Global Financial Services

* Indian bonds remain trapped in a ‘perpetual bear-steepening’ state, mirroring pressures seen in DMs.

While macro backdrops differ across economies, the common thread is a policy-induced trainwreck ahead, higher term premia, and the risk of fiscal dominance of monetary policy

* India is not as extreme unlike the west or even some EMs: its combined fiscal and debt trajectory has improved secularly over time, barring recent years.

Yet the bond market has failed to enjoy the state of the so-called ‘Goldilocks’ inflation-growth or easier rate regime, implying more structural pain underneath.

* Persistently higher rates and a broken monetary-transmission mechanism (MTM), if sustained, could increasingly expose equity valuations to risk from rising real rates and cost of capital.

* This note expounds the reason behind this cycle’s MTM via bond yields probably being the worst among the past easing cycles (driven by rising term premia), how dislocated bond yields have become, how the classic FX-fixed income policy trade-off is failing, and if there is a path out of this dislocation.

* We believe bond bearishness—driven by a mix of structural, cyclical, and one-off factors—is likely to persist through rest of FY26, with the 10Y yield hovering in the 6.55–6.70% range.

* FY27 may see curve flattening, albeit with the balance of risks appearing skewed somewhat toward a bear flattening.

Even as some one-off factors reverse in FY27, the structural pain, unless addressed, will cast a shadow on bonds and imply a high-for-long state.

Segments covered in the report:

1. The not-so-curious case of bear-steepening in DMs.

2. India macro backdrop: does it fully justify such persistent bond bearishness?

3. Are Indian bonds really dislocated vs past cycles?

4. What led to this dislocation?

5. The classic trade-off of FX (INR) and Fixed Income (India rates) not paying off

6. What is the way out for this dislocation?

7. Way ahead: Bond-Bearishness may continue in the near term; FY27 to see curve flattening

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