India's benchmark 10-year government bond yield fell to 7.17% on Thursday, its lowest close since Sept. 29, extending a sharp two-day rally as crude oil prices slumped and the Reserve Bank of India kept pulling surplus cash out of the banking system.

The yield ended 2 basis points lower on Thursday after dropping nearly 11 basis points on Wednesday, its steepest one-day fall in seven months, Business Standard reported. For investors across Asia, the move matters because India's bond market has been among the region's most sensitive to oil: the country imports most of its crude, and higher fuel bills feed straight into inflation and the rupee. Earlier this week the yield had fallen to 7.30% as oil retreated from US$117.

Oil and short covering drive India's bond rally

Brent crude futures were down nearly 9% at US$95.93 a barrel on Thursday, according to Business Standard, which cited a Finrex Treasury Advisors note pointing to the possibility of improved supplies through the Strait of Hormuz. Brent had traded near US$120 in late October.

Global markets were also reacting to the U.S. midterm elections, and lower U.S. Treasury yields helped Indian debt on Wednesday. A dealer at a public sector bank told Business Standard that traders had covered roughly 140 billion rupees of short positions on Tuesday and another 40 billion to 50 billion rupees on Wednesday, adding to the buying.

The rupee gained for a fifth straight session on Thursday, closing at 94.47 per dollar, its strongest since Oct. 21, after touching 94.33 during the day. It had settled at 94.65 on Wednesday. Business Standard reported on Wednesday that the currency had gained 1.25% since October, helped by RBI measures to curb speculative bets in the derivatives market, though it was still down about 5% so far in 2026. Cheaper oil and a firmer rupee together ease two of the pressures behind the sharp rise in bond yields in October.

Not everyone expects the rally to last. Suyash Choudhary, chief investment officer for fixed income at Bandhan Mutual Fund, told Business Standard that light duration positioning had amplified the fall in yields. He said a durable shift would require a measurable slowdown in global spending on artificial intelligence infrastructure, which he argued is competing hard for global capital and keeping real yields high. Until then, he said, the fund would "retain the view of higher yields in the time ahead."

RBI keeps draining surplus cash

The central bank has been running daily variable rate reverse repo auctions to absorb excess cash, a sign that banks are flush with rupees after a period when the cash surplus shrank as the RBI defended the rupee.

On Nov. 4, the RBI's operations absorbed a net 1.78 trillion rupees, according to its money market data. Banks parked 1.37 trillion rupees in the standing deposit facility at 5.25%, the floor of the policy corridor, while overnight call money traded at a weighted average of 5.51%, just above the 5.49% cut-off rate the RBI set in its reverse repo operations that day.

Appetite to lend to the central bank at those rates is fading, however. At Thursday's overnight auction, the RBI offered to take in 750 billion rupees but received bids for only 77.67 billion rupees, all of which it accepted at 5.49%. The central bank said it will hold a three-day reverse repo auction for 250 billion rupees on Friday, Nov. 6, with the funds returned on Monday, Nov. 9.

360 billion rupee bond sale tests long-end demand

The rally faces its first supply test on Friday. The government is selling 360 billion rupees of existing bonds: 230 billion rupees of the 7.06% bond due in 2041 and 130 billion rupees of the 7.43% bond due in 2076, according to the RBI. It can keep up to 20 billion rupees of extra bids on each.

Primary dealers must each commit to underwrite at least 5.48 billion rupees of the 2041 bond and 3.10 billion rupees of the 2076 bond, the RBI said. Results are due the same day, with settlement on Nov. 9. The cut-off on the 50-year paper will show whether the two-day rally has run ahead of investor demand for duration.