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How does India borrow and lend?

Understanding how the money flows in the Indian economy and how fixed income instruments react to macroeconomic events along with Monetary Policy Decisions.

21 April 2026 • 4 min read • By

Repo rate changes move the markets, but the more interesting story is how money flows through the Indian economy, and how bond yields bend around both big economic events and the RBI's decisions.

Setting the Stage

3 rates tell the story: the repo rate, the 91-Day Treasury Bill cut-off yield, and the 10-year government bond yield.

The repo rate is what the RBI charges banks to borrow overnight against government securities. Put simply, it is the price of money in India, and everything else adjusts when it moves.

Why do banks borrow from the RBI at all? They must keep a share of their net demand and time liabilities (NDTL) as idle cash with it, 3% of NDTL as of early 2026, and that amount grows as household deposits grow.

The 91-Day T-Bill is short-term government borrowing from the public. Its cut-off yield is the highest rate accepted at the RBI's auction: the government's short-term borrowing cost.

The price of money in India, every time the RBI changed it.

The repo rate is what banks pay to borrow overnight against government paper. It holds a level until the committee moves it, which is why this is a staircase and not a curve.

The RBI policy repo rate as a staircase from June 2008 to August 2026, falling to a record low of 4.00 per cent in May 2020 and standing at 5.25 per cent

Per cent per annum

4.00%, the lowest the repo rate has ever been

RBI Handbook of Statistics, Table 40 · Jun 2008 to Aug 2026

The 10Y G-Sec yield is what investors demand to lend to the Government of India for 10 years through its benchmark bond. It is the government's long-term borrowing cost, and the benchmark rate for the whole economy.

The Interplay

The short-term rate, the 91-Day T-Bill yield, reacts almost instantly to every decision of the Monetary Policy Committee. The 10-year yield follows the same trend but slowly, because it also prices in future repo rates, inflation, the fiscal deficit, global (especially US) yields and liquidity. If a hike or cut was already expected, the 10-year may barely move.

The bill followed the repo down. The 10-year kept its own counsel.

All 3 at their own levels, in per cent. The repo rate fell 125 basis points from February 2025; the 91-day bill gave up more than that, the 10-year gave up a third of it.

The repo rate, the 91-day T-bill yield and the 10-year G-Sec yield monthly from April 2023 to June 2026: the bill tracks the repo down through the cutting cycle while the ten-year barely moves

Per cent per annum, secondary-market yields

Feb 2025 to Dec 2025: Cutting cycle

The long end is priced off growth and inflation, not off the overnight rate

RBI Handbook of Statistics, Tables 40, 177 and 178 · Apr 2023 to Jun 2026

A Mental Model

A simple question to start with:

If a bank's cost of borrowing (the repo rate) is rising, why would it ever lend to the government at a lower rate? Shouldn't the repo rate always sit below the yield?

Not quite, for 4 reasons:

What the History Shows

  1. 2007-09: Liquidity was flooding the markets before a planned tightening. Short-term yields dropped sharply while the repo stayed put, right as the 2008 financial crisis hit.
  2. 2009-11: After the 2007-2009 dip, the RBI's foreign reserves rose to $315.7 billion by June 2011 on capital inflows and recovery. Short-term government borrowing was again at a record low, but long-term yields were rising: the bond market did not believe the easing would last, and rates were hiked in 2012.
  3. 2013-14: The Taper Tantrum shows clearly, with short-term yields at a record high. In 2013 the US Federal Reserve signalled it would slow its quantitative easing bond buying. Investors feared tighter global money, US yields jumped and capital left emerging markets. India saw a weaker rupee, higher bond yields and volatile stocks.
  4. 2020-22: In the COVID-19 pandemic, short-term yields and the repo both fell below their 2009 lows. The repo was cut hard and the 91-Day T-Bill yield followed, flooding markets with liquidity. Long-term yields did not collapse, because the fiscal deficit was huge, bond supply jumped, inflation risks lingered and global yields moved around.
  5. Late 2025 onwards: The 91 Day T-Bill yield moves closely with the repo, but the 10-year yield has been moving the other way. This is Bull Flattening: the bond market thinks tightening will not last, that rates are near their peak, growth will slow, inflation will fall and cuts will follow.

What It Means for Equities

When the repo and short-term yields fall, money is easier, investors take more risk and valuations stretch, especially in mid-caps, small-caps and high-growth stocks. When tightening starts and short-term yields jump, money gets choosy, valuations shrink and the market rewards strong balance sheets over fast expansion.

The 10-year yield works more quietly. It is the economy's discount rate: when it rises, future profits are worth less today, and when it falls, growth stories get their premium back. A flattening yield curve, like the recent one, often signals slower growth ahead, which has historically favoured large caps and defensives over leveraged cyclicals. Why this matters: watching bonds will not predict tomorrow's stock moves, but it tells you how much investors will be willing to pay for earnings.

Sources

Every figure comes from RBI data and releases, the Union Budget and the US Federal Reserve.

Data

RBI releases and rules

RBI Annual Reports

Federal Reserve