Context
The RBI’s Annual Report 2025–26 highlights rising global bond yields and tighter monetary conditions, signalling the gradual end of the era of cheap global money that followed the 2008 Global Financial Crisis and the COVID-19 pandemic.
Core Concepts
- Government Bonds
- Debt instruments issued by governments to raise funds.
- Offer periodic interest payments and repayment of principal at maturity.
- Bond Yields
- Return earned on government bonds.
- Serve as benchmark interest rates across the economy.
- Quantitative Easing (QE)
- Monetary policy under which central banks purchase financial assets using newly created money.
- Aims to increase liquidity and reduce borrowing costs.
Era of Cheap Global Liquidity
- Ultra-low interest rates and large-scale quantitative easing.
- Low inflation and abundant global liquidity.
- Strong capital flows towards emerging economies.
Drivers of Tightening Global Liquidity
- Resurgence of inflation due to supply-chain disruptions and geopolitical tensions.
- Withdrawal of accommodative monetary policies by major central banks.
- Rising sovereign debt and borrowing requirements.
- Sustained increase in sovereign bond yields across advanced economies.
Implications for India
- Reduced attractiveness of emerging-market assets, including those in India.
- Greater volatility in capital flows and financial markets.
- Pressure on the rupee and external-sector stability.
- Higher borrowing costs for governments and businesses.
- Increased challenges in financing the Current Account Deficit (CAD).
Significance
- Marks a shift from liquidity-driven to fundamentals-driven capital flows.
- Enhances the importance of macroeconomic stability and investor confidence.
- Highlights the need for stronger domestic growth drivers and financial resilience.
Challenges and way forward
| Challenges | Way forward
|
| Tighter global liquidity conditions. | Maintain fiscal prudence and monetary stability. |
| Volatile capital flows. | Strengthen forex reserves and external-sector resilience. |
| Reduced attractiveness of Indian assets. | Improve the investment climate through structural reforms. |
| Higher borrowing costs. | Diversify funding sources and deepen capital markets. |
| Limited depth of domestic financial markets. | Develop bond and corporate debt markets. |
| Pressure on the rupee and external balances. | Ensure orderly exchange-rate management and external stability. |
| Structural bottlenecks affecting competitiveness. | Promote manufacturing, exports, and ease of doing business reforms. |
Conclusion
The end of the cheap-money era marks a structural shift in global capital flows. In this evolving financial environment, India’s long-term attractiveness will increasingly depend on macroeconomic stability, sustained growth, deeper financial markets, and continued structural reforms.
