Shifting RBI Signals Sap Gilt Trading; August Turnover Drops 20%

Indian government bond trading slowed sharply in August as traders struggled to read the Reserve Bank of India’s policy signals and stayed wary of carrying large directional positions. Turnover in dated government securities fell 20% on month to ₹11.23 trillion from ₹14.04 trillion in July, according to Clearing Corporation of India data.

Fewer trading days explain only part of the decline. August had 20 sessions in the available data, against 22 in July. Yet average daily turnover still fell 12% to ₹561.5 billion from ₹638.0 billion. The slowdown had already begun in July. Government bond trading volume fell 7% that month, while average daily turnover declined 12%.

That makes August look less like a calendar distortion and more like a market losing momentum.

Signal Risk
The caution came as traders repeatedly recalibrated their view of the RBI.

Policy communication initially encouraged one set of rate expectations. The subsequent Monetary Policy Committee minutes were read differently by parts of the market. The gap made positioning around RBI guidance harder.

The abrupt closure of the FCNR(B) swap window added another layer of uncertainty. Traders had to reassess expectations around foreign-currency inflows and domestic liquidity. RBI signalling itself became a positioning risk.

Global markets offered little comfort.

Elevated US Treasury yields narrowed the India-US yield differential. Higher crude oil prices revived concerns over imported inflation. Tensions in West Asia also made traders more reluctant to carry large positions over weekends. The result was a market willing to trade, but less willing to take a view.

That caution persisted despite heavy supply. The Centre sold ₹1.26 trillion of bonds through four auctions in August. A ₹57 billion buyback reduced net fresh supply to about ₹1.2 trillion. That was equivalent to nearly 11% of total gilt turnover during the month.
Ordinarily, fresh supply of that scale would generate positioning, hedging and secondary-market churn. Instead, trading weakened.
The number of government bond trades fell 14% to 4,645 from 5,412 in July. Orders declined to 7,785 from 8,781. The share of order value converted into traded value slipped to 32.65% from 34.00%.

Heavy duration supply made the caution particularly visible at the long end. Investors became more price-sensitive and looked for greater auction concessions rather than aggressively adding exposure.

Liquidity vs Conviction
The weakness was concentrated in central government bonds.

Average daily state bond turnover rose 12.1% to ₹35.8 billion from ₹32.0 billion. Treasury-bill turnover was almost unchanged at ₹66.4 billion, against ₹66.2 billion in July. Dated government securities were the outlier.

That weakens the argument that fewer trading days or a broad retreat from rupee debt drove the slowdown.

Market liquidity also remained reasonably healthy in the most actively traded securities. The average bid-ask spread on securities classified by CCIL as liquid narrowed to 0.3167 bps in August from 0.3499 bps in July. Average impact cost fell to 0.0285% from 0.0317%.

Prices were available at tight spreads. Traders simply did less business. Conditions were weaker outside the most liquid securities. Bid-ask spreads on semi-liquid papers widened to 4.0156 bps from 3.2748 bps.

The distinction matters.

August was not a market starved of liquidity. It was a market short of conviction. The year-on-year comparison tells a similar story.
Gilt turnover rose just 6% to ₹11.23 trillion from ₹10.59 trillion in August 2025. Over the same period, outstanding government securities increased 12% to ₹126.22 trillion from ₹112.66 trillion.

The debt stock therefore expanded at twice the pace of turnover. Turnover as a share of outstanding securities slipped to 8.9% from 9.4% a year earlier. The market is getting larger. Trading intensity is not keeping pace.

Little Relief
September has yet to reverse the trend.

Average daily turnover in dated government securities stood at ₹530.9 billion in the seven sessions through September 9. That was about 5% below August and 17% below July.

Near-term caution may persist as traders assess how far the RBI will go in absorbing surplus liquidity. Variable rate reverse repo operations are already part of the toolkit. Expectations of stronger measures, including sell/buy swaps or an incremental cash reserve ratio, have also kept traders wary of building large positions.

Crude oil and US Treasury yields move every day. They can be repriced quickly. The harder variable is domestic policy direction.

The US Federal Reserve’s September meeting could provide the next global trigger after inflation data in India and the US. But for the Indian bond market, the larger question remains closer to home.

Until the RBI signal becomes easier to read, traders may continue to keep their books light.