🎯 In 30 seconds: A bond pays fixed interest, so when market interest rates rise, existing bonds lose value, and the longer the bond, the bigger the fall. In India the benchmark is the government security (G-sec), and since 2021 you can buy G-secs, Treasury bills and state government loans directly from the RBI through RBI Retail Direct, free of charge. Corporate bonds are sold through online platforms that must be SEBI-registered stock brokers. Bond yields matter to share traders because they set the return you can get without stock risk. When yields rise, every future rupee of profit is worth less today, and some kinds of companies feel it far more than others.
Bond basics in one minute
Imagine lending ₹10,000 to a neighbour who runs a tailoring shop. She promises ₹350 every six months for ten years and your ₹10,000 back at the end. That is a bond. The amount repaid is the face value, the interest rate printed on it is the coupon, and the end date is the maturity. If you sell the IOU to someone else before it matures, the price you get depends on what interest rates are available elsewhere at that moment. The return a buyer earns at today's price, if they hold to maturity, is the yield to maturity, or simply the yield.
The RBI's primer on the government securities market puts the core rule plainly: when market interest rates rise, bond prices fall, and when they fall, prices rise. Yield and price move in opposite directions.
The Indian bond menu
| Bond | Issuer | Key features |
|---|---|---|
| Treasury bills (T-bills) | Government of India | Issued in 91, 182 and 364 day tenors. No coupon: issued at a discount and repaid at ₹100 face value |
| Dated G-secs | Government of India | Coupon paid half-yearly. Tenors generally from 5 to 40 years. Named by coupon and maturity, such as "7.17% GS 2028" |
| State Development Loans (SDLs) | State governments | Dated bonds issued by states, traded at their own yields, which you can compare with central G-secs of the same maturity |
| Corporate bonds and NCDs | Companies, banks, NBFCs, PSUs | Higher yield for credit risk. Rated by credit rating agencies registered with SEBI. Liquidity varies a lot |
The RBI calls G-secs "risk-free gilt-edged instruments" because they carry practically no risk of default in rupee terms. That is not the same as no risk. If you sell before maturity, the price can be below what you paid. The RBI's own Retail Direct FAQ says so: G-secs carry no credit risk but have market risk if you sell early.
A T-bill example from the RBI primer: a 91-day T-bill with ₹100 face value issued at ₹98.20. You earn ₹1.80 in 91 days. As an annual yield: ₹1.80 ÷ ₹98.20 × 365 ÷ 91 = about 7.35%. That is the RBI's illustration, not a current rate.
How you can buy them
RBI Retail Direct. Launched on 12 November 2021, it lets an individual open a Retail Direct Gilt (RDG) account with the RBI itself, online, with a PAN, a savings bank account in India, KYC documents, an email and a mobile number. Through it you can:
- Bid in primary auctions of T-bills, dated G-secs and SDLs in the non-competitive segment: you state the amount, not the price, and are allotted at the weighted average price of the auction. You pay an indicative price plus a markup when bidding, and any excess is refunded to your bank within two business days.
- Buy and sell in the secondary market through the RBI's NDS-OM trading platform.
- Buy and sell Sovereign Gold Bonds (the 2021 FAQ lists both primary and secondary market purchases; check whether any new issue is open), and use nomination, pledge and gift facilities.
The RBI's FAQ says the account is completely free of charge. Minimum investment, as stated on 12 November 2021, is ₹10,000 for T-bills, dated G-secs and SDLs, and the maximum non-competitive bid in a dated G-sec is ₹2 crore face value per security per auction. Auctions are usually held on Wednesdays (T-bills), Fridays (dated G-secs) and Tuesdays (SDLs), following calendars the RBI publishes. Check the portal for current terms before you invest.
Online bond platforms. Apps and websites that sell listed corporate bonds and NCDs to individuals are online bond platform providers (OBPPs). Since November 2022, SEBI's NCS Regulations require them to be registered as stock brokers in the debt segment of a recognised stock exchange. In November 2024 SEBI passed an interim order against platforms that were selling unlisted NCDs to retail investors without registration. Before you invest through any bond app, check its name in SEBI's list of registered stock brokers in the debt segment, and check that the bond itself is listed.
Why bond prices fall when yields rise
Take a 10-year G-sec with a 7% coupon, bought at ₹100 face value. It pays ₹3.50 every six months. Now new 10-year G-secs are issued at 8%. Nobody will pay ₹100 for your 7% bond when ₹100 buys 8% elsewhere, so its price falls until its yield also reaches 8%.
| Market yield rises from 7% to 8% | 10-year 7% bond falls to about ₹93.20 (−6.8%) |
| Market yield falls from 7% to 6% | 10-year 7% bond rises to about ₹107.44 (+7.4%) |
| Market yield rises from 7% to 8%, 2-year 7% bond | falls to about ₹98.19 (−1.8%) |
The longer the maturity, the more coupons are locked in at the old rate, so the bigger the price move. The RBI primer measures this with duration. A rough rule: a bond's price changes by about its duration times the change in yield, in the opposite direction. The 10-year bond above has a duration of a little over 7 years, so a 1 point rise in yield costs about 7%.
How bond yields reach share prices
Bond yields reach stocks through three main channels. The first two are arithmetic; the third is how businesses work.
1. The discount rate. A share is worth the profits it will pay out in future, brought back to today's value. The rate used to bring them back starts from the risk-free rate, in India usually the 10-year G-sec yield, plus a premium for risk. Raise the risk-free rate and every future rupee is worth less today. The effect is largest for companies whose profits lie far in the future.
A simple example with hypothetical companies valued as steady payers of cash forever:
| Steady Co: ₹100 crore a year, no growth, discount rate 10% | ₹100 crore ÷ 10% = ₹1,000 crore |
| Same, discount rate rises to 11% | ₹100 crore ÷ 11% = ₹909 crore (−9%) |
| Growth Co: ₹100 crore next year, growing 7% a year forever, discount 10% | ₹100 crore ÷ (10% − 7%) = ₹3,333 crore |
| Same, discount rate rises to 11% | ₹100 crore ÷ (11% − 7%) = ₹2,500 crore (−25%) |
That is the arithmetic behind a common pattern: when yields jump, high-P/E growth stocks often fall harder than steady, cheaper ones. It is a tendency, not a rule. Building a stock thesis shows how to build a DCF with a G-sec yield as the starting point.
2. The competition for your money. The earnings yield of a stock or index is earnings divided by price, the inverse of the P/E. A P/E of 25 means an earnings yield of 1 ÷ 25 = 4%. Some investors compare it with the 10-year G-sec yield. If a G-sec pays 7% with no default risk and the index earns 4% on its price, buyers of the index are counting on profits growing fast enough to make up the gap. NSE Indices publishes P/E figures for the Nifty indices if you want to compute it. This comparison is popular, but it is a rough gauge of valuation, not a timing tool: earnings yields and bond yields have stayed far apart for long stretches.
3. The cost of borrowing. Higher rates raise interest costs for indebted companies and make loans dearer for their customers. Bond yields usually move with the RBI's policy rate and inflation expectations. The economy and stocks covers the RBI's Monetary Policy Committee and the repo rate.
Real yields and credit spreads
Two more readings help.
- Real yield = bond yield minus expected inflation. A 7% G-sec when inflation is expected at 4% gives a real yield of about 3%. If inflation expectations fall while the bond yield stays put, the real return has gone up. The RBI's inflation target and the latest CPI readings are covered in the economy chapter; check the RBI and MOSPI websites for current figures rather than relying on any number written down here.
- Credit spread = corporate bond yield minus the G-sec yield of the same maturity. When lenders get nervous about companies, spreads widen, even if G-sec yields are flat. A sharp widening in spreads for lower-rated borrowers is a sign of stress that often shows up in shares of the same borrowers.
Do stocks and bonds move together or apart?
Sometimes apart, sometimes together. When fear hits and investors run to safety, G-sec prices can rise (yields fall) while shares fall. When the problem is rising inflation and interest rates, both can fall at the same time, because the same higher discount rate hurts both. There is no fixed relationship. Treat any claim that "bonds always hedge stocks" with suspicion, and look at how both behaved in the specific periods you care about.
Which Indian stocks feel rising rates most
This is reasoning from how these businesses earn money, not a rule:
| Type of company | Why rates matter |
|---|---|
| Banks | Mixed. Loans may reprice upward, helping margins, but banks hold large portfolios of G-secs whose market value falls when yields rise |
| NBFCs and housing finance companies | They borrow from markets and banks, so funding costs rise quickly, and loan growth can slow |
| Real estate, autos, consumer durables | Many customers buy on loans; higher EMIs can slow demand |
| Heavily indebted companies (infrastructure, power, telecom) | Interest costs eat more of their profit |
| High-P/E growth companies | Value lies far in the future, so the discount rate matters most (see the example above) |
| Cash-rich companies with little debt | Usually the least affected; may even earn more on their cash |
Sectors and the business cycle in India looks at these sectors in more detail.
Try it
- On the RBI's website, find the press release with the results of the most recent T-bill auction. Note the cut-off yield for the 91, 182 and 364 day bills.
- Find the most recent dated G-sec auction result. Note the coupon, maturity and cut-off yield.
- Using the method above, work out roughly how much a ₹1 lakh holding of that bond would fall if yields rose by 1 point (use about 7% per point for a 10-year bond).
- From NSE Indices, note the Nifty 50's current P/E. Compute its earnings yield (1 ÷ P/E) and compare it with the 10-year G-sec yield. Write one sentence on what the gap implies about the growth investors expect.
If you are curious about Retail Direct, read its FAQ and user manual on the RBI website before opening an account. You do not need to invest to learn from the auction results.
- Market yields fall. What happens to the price of a bond you already own? Answer: It rises, because its fixed coupon is now worth more than what new bonds pay.
- Which falls more when yields rise by 1 point, a 2-year or a 10-year G-sec? Answer: The 10-year, because more of its coupons are locked at the old rate. Its duration is longer.
- A 91-day T-bill with ₹100 face value costs ₹98.50. What is its approximate annual yield? Answer: ₹1.50 ÷ ₹98.50 × 365 ÷ 91 = about 6.1%.
- An index trades at a P/E of 20. What is its earnings yield? Answer: 1 ÷ 20 = 5%.
- Before investing through a bond app, what two things should you check? Answer: That the platform is registered with SEBI as a stock broker in the debt segment, and that the bond is listed and rated, with a credit risk you understand.
Sources
- RBI: Government Securities Market in India, a primer (FAQ)
- RBI: Retail Direct Scheme FAQs
- RBI: Non-competitive bidding facility to retail investors in G-sec and T-bill auctions (Retail Direct notification)
- SEBI: Issue and Listing of Non-Convertible Securities Regulations, 2021, Regulation 51A (online bond platform providers)
- SEBI: Interim ex parte order in the matter of unregistered online bond platforms (November 2024)
- SEBI: Registered stock brokers in the debt segment