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Informist, Friday, Mar. 28, 2025

 

--10-year gilt yield ends at 6.58% Fri, down 47 bps in FY25
--10-year gilt yield falls 47 bps in FY25, most since FY20

 

By Aaryan Khanna

 

NEW DELHI – The 10-year benchmark gilt yield ended at 6.58% on Friday, falling by 47 basis points in 2024-25 (Apr-Mar) with India's inclusion on global bond indices and the Reserve Bank of India's Monetary Policy Committee interest rate cut after a gap of nearly five years in February. To no surprise, the fall is also the most in that timespan, as the 10-year gilt yield had fallen over 120 bps in FY20 due to the onset of the COVID-19 pandemic.

 

Positives continued to pile up for the bond market through the year, particularly with macroeconomic data making the case for a rate cut. Inflation in Apr-Feb has averaged 4.7%, down from 5.4% in FY24, and February's 3.6% print was lower than the RBI's medium-term target of 4%. Moreover, India's GDP is estimated to have grown at a four-year low pace of 6.5% in FY25 from 8.2% a year ago. This was finally seen as the trigger for the MPC to cut the repo rate by 25 basis points to 6.25% at its last meeting in the financial year.

 

"Throughout the year, we witnessed a steady rally, with yields declining by approximately 50 basis points, despite minor setbacks due to inflation spikes and global shifts following the (Donald) Trump presidency," said V.R.C. Reddy, head of treasury at Karur Vysya Bank. "However, starting in December, the RBI's measures, including a CRR (cash reserve ratio) cut, liquidity infusions through OMOs (open market operations), and a 25 basis point rate cut, further fuelled the bond rally." Peaking at 7.25% in April, the 10-year gilt yield ended at the year's low on Friday, at 6.58%.

 

Buying gilts at auction for the first time since September 2021, the RBI mopped up INR 2.45 trillion worth of government bonds since Jan. 30 to infuse durable liquidity into the banking system, which had fallen into deficit. Before that, the central bank picked up INR 388.15 billion in the secondary market in January. In addition to reducing the supply that the market had to absorb, the addition of durable liquidity was a boon for traders sapped of it since mid-December.

 

The fall in the 10-year yield was topped off by a slump in March by 15 bps, marking the best month for gilts since April 2023, as banks replaced bonds sold to the RBI. Even before that, demand-supply dynamics were favourable through the year, with the government trimming its already-lower-than-estimated gross borrowing aim by around INR 120 billion to INR 14.01 trillion in the middle of FY25. Net supply for investors was again lower than redemptions would indicate, with the government buying back bonds worth INR 881.64 billion maturing in FY26.

 

Moreover, India's entry on global bond indices operated by JP Morgan and Bloomberg has secured a steady stream of foreign portfolio investment into gilts. Fully accessible route bonds, which have no caps for foreign investment, have commanded the maximum 10% weightage on both providers' emerging market bond indices.

 

Passive inflows from index trackers, as well as active FPIs betting on further rate cuts in India, have led to investment worth INR 1.32 trillion in fully accessible route gilts in FY25. Their holdings in these instruments have come up to a record INR 3.06 trillion as of Friday, and are expected to grow further in the new financial year.

 

"This was a dream year for demand-supply, with both the government and the RBI on the buying side and a cut in rates making traders go constantly long," a senior treasury official at a state-owned bank said. "PSU banks have also been well compensated in terms of profit booking by the RBI, which has taken out so much supply that it looks like FY26 is also going to go very comfortably (for gilt yields)."  End

 

Edited by Akul Nishant Akhoury

 

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