Informist Poll
10-year gilt yield may tread water to 6.70% by March-end
This story was originally published at 20:54 IST on 3 March 2025
Register to read our real-time news.Informist, Monday, Mar. 3, 2025
By Srijita Bose and Aaryan Khanna
MUMBAI/NEW DELHI – Government bond yields are likely to tread water until the end of the financial year on Mar. 31. With no fresh issuances of gilts scheduled for the rest of 2024-25 (Apr-Mar), bond traders will likely keep to the sidelines as the liquidity deficit in the banking system remains a concern.
According to the median of estimates of 15 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.70% at the end of March against 6.73% on Feb 28. The yield inched up slightly in February despite the Reserve Bank of India's Monetary Policy Committee cutting the policy repo rate by 25 basis points to 6.25%.
March is traditionally the month when the cash buffers of banks are the tightest, and systemic liquidity remains in deficit despite the central bank's infusions through various tools. This may lead to caution among traders and investors to pick up gilts, respondents said. With advance tax outflows of around INR 1.5 trillion mid-month, seasonal drain in currency in circulation, and demand for credit, the deficit is expected to widen sharply without the Reserve Bank of India's support. In February, the liquidity deficit averaged INR 1.7 trillion. The central bank is seen actively keeping overnight rates next to the repo, without muscling down the deficit.
Traders are almost fully pricing in another 25-basis-point rate cut in April by the Monetary Policy Committee, as the new panel has shifted its focus to slowing growth as inflation has cooled closer to its 4% medium-term mandate. However, the rate cut cycle in India is still seen shallow, and uncertainty lingers on whether the panel will cut rates again in 2025. With the advance estimate for FY25 GDP growth revised higher to 6.5%, and the RBI projecting 6.7% growth in FY26, policymakers may remain light-handed on additional support, respondents said.
"There are headwinds on the currency, tightness in liquidity is also driving that...don't see the yield moving down from here, it will only happen when macros (macro-indicators) will happen...such as growth slowing down dramatically," Dwijendra Srivastava, executive vice president and chief investment officer - debt at Sundaram Asset Management Co., said.
Even as the repo rate has fallen and demand-supply conditions have been positive, traders have avoided picking up gilts due to fear of US President Donald Trump's tariff threats and policy uncertainty. Trump had earlier threatened to impose reciprocal tariffs along with non-monetary tariffs and trade barriers on countries. The impact of Trump policies on US Treasury yields and the US Federal Reserve's monetary policy is closely watched.
What has also led to the poor show from gilts despite the February rate cut has been the lack of institutional investor demand for bonds maturing in 30 years and above. Robust demand from this segment helped cap gilt yields since mid-2022 through a rate hiking cycle and a record borrowing programme. The positives are turning as life insurers have not been able to sell enough long-term products, and the expected demand has disappointed traders such as mutual funds who had already piled into the segment, respondents said.
As state bond supply surges in March – states plan to raise INR 505 billion on Tuesday, easily the largest auction this fiscal – the gilt yield curve is likely to steepen, but only between long-term bonds and the 10-year benchmark gilt. Short-term gilts are still likely to remain out of favour amid tight liquidity, respondents said.
"This could be the end of the positive story on life insurance propping up long-term bonds," said Poonam Tandon, chief investment officer at IndiaFirst Life Insurance. "And if there is another rate cut in April, then even traders in the belly of the curve will have nothing to play for further."
On the other hand, relief could come in the form of falling inflation, and comfort on its future trajectory. Some estimates for headline CPI inflation peg it at lower than the RBI's medium-term target of 4% in February, due on Mar. 12, a few quarters ahead of schedule. Concerns over inflation are also easing as crude oil prices fall, with conflicts in West Asia and Ukraine seen to be winding up, respondents said. After peaking at over $82.60 a barrel in January, the near-month Brent crude futures contract has cooled to below $75 a barrel over the past week.
Hopes of further RBI liquidity infusion in March should also prevent gilt yields from running up sharply. The RBI is expected to continue infusing liquidity through various measures this month, including open market bond buys, dollar/rupee buy/sell swaps, and long-term variable rate repos it deployed in January and February. Moreover, banks have space in their investment portfolios after the RBI bought INR 1 trillion of gilts at the auctions in Jan-Feb, that they might look to bring into play should the 10-year gilt yield rise above 6.75%, respondents said. All in all, this makes for a tight trading environment that may mimic the latter half of February, they said.
The following are estimates at the beginning of the month for yield levels/range for the 10-year benchmark bond at the end of March:
|
ORGANISATION |
YIELD |
| Anand Rathi Global Finance | 6.70-6.78% |
| Bank of Baroda | 6.70% |
| CSB Bank | 6.78% |
| HDFC Bank | 6.70% |
| Industrial and Commercial Bank of China | 6.65% |
| IDFC FIRST Bank | 6.70% |
| IndiaFirst Life Insurance | 6.75-6.80% |
| Karur Vysya Bank | 6.68-6.70% |
| LIC Mutual Fund | 6.60-6.75% |
| PNB Gilts Ltd. | 6.68% |
| Private bank | 6.70% |
| State-owned bank | 6.70-6.80% |
| STCI Primary Dealer | 6.68-6.70% |
| Sundaram Mutual Fund | 6.70-6.80% |
| UCO Bank | 6.72% |
End
US$1 = INR 87.37
Edited by Ashish Shirke
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