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Informist, Thursday, Apr. 3, 2025

 

By Vidhushi RajPurohit

 

MUMBAI – The new financial year has started well for government bonds due to stronger wagers on a repo rate cut next week and a sharp improvement in banking system liquidity. Ahead of the Monetary Policy Committee's decision on Wednesday, market participants are expecting yields on government bonds to remain near their three-year lows by the end of the month.

 

According to the median of estimates from 15 money managers, treasury heads, and economists polled by Informist, the yield on the 10-year 6.79%, 2034 bond is seen at 6.48% at the end of April. In March, gilt yields cooled steadily, with that on the 10-year benchmark dropping 15 basis points as it marked its best month in nearly two years. The party did not end there, with the first trading day of April seeing a massive 10 bps fall in yields after the Reserve Bank of India Tuesday announced that it would buy INR 800 billion of gilts in April through open market auctions, sparking speculation that the MPC may loosen its stance at its next meeting to 'accommodative' from 'neutral' along with the widely-expected 25 bps cut in the repo rate.

 

The RBI's recent proactive liquidity infusions are seen as a precursor to a softer stance, respondents said. And should the MPC's stance change, traders will also firm up bets that interest rates may be cut further in either June or August, which would help bring down bond yields even more by the end of April. For now, the broad expectation is that the repo rate will be lowered by at least 50 bps more in 2025 to 5.75%. The central bank is also expected to buy INR 2 trillion of gilts in 2025-26 (Apr-Mar)--including the purchases scheduled for April--while also using other instruments to infuse liquidity, dealers said.

 

"Right now, the banking system will still require an infusion of INR 3 trillion to INR 4 trillion (in FY26) and the central bank might bring more OMO auctions along with buy/sell swap auctions to do that," said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. "More clarity on liquidity and the yields will be (forthcoming) after the policy commentary is out, so market is now waiting for that."

 

However, with yields already tumbling sharply, much of the gains for bonds have likely passed, respondents said. Moreover, Wednesday's hotly-anticipated policy outcome can become a larger event risk as traders' portfolios have ballooned and several positives are already factored in. Some traders think the RBI will infuse liquidity in a more gradual manner going ahead since the seasonal tightening seen in March has now passed.

 

With gilt yields having already cooled, market participants now expect the MPC outcome to dictate the trajectory going ahead, with some participants predicting some retracing of gains if the MPC does not relax its stance next week or if there is no forward guidance on further monetary easing. To be sure, those who cite this as the base case are few and far between, especially after the US announced its reciprocal tariffs on Wednesday. While the impact of the long-threatened tariffs on Indian government bonds may not be direct, they are seen hurting GDP growth this year by 30-80 bps, according to economists' estimates. With CPI inflation in Jan-Mar expected to undershoot the RBI's forecast of 4.4%, a larger quantum of rate cuts as soon as April is also not off the table, which some traders are betting on. In a note earlier this week, economists at Barclays said there was a strong case for the MPC to reduce the repo rate by 35 bps.

 

Respondents expect foreign portfolio investor inflows to continue in April, with appetite for emerging market assets broadly unchanged after the announcement of the tariffs and US Treasury yields expected to slump as fears of a recession in the US build.

 

"In terms of US tariffs, we will be mostly tracking the US yields and closely monitor the movement of rupee," said Akhil Mittal, senior fund manager – fixed income, Tata Mutual Fund. "But there might not be much negative cue for the G-sec market as India is expected to be least impacted among all the emerging economies and therefore foreign inflows are expected to come in gradually in the next one month."

 

On the whole, investor appetite for Indian sovereign debt is expected to remain robust, with the RBI buying INR 2.8 trillion worth of gilts in Jan-Mar. Most of the gilts that banks sold at the OMO auctions were from their 'held-to-maturity' books and the replacement demand through both gilt and state bond buys will keep yields in check even if risks and disappointments emerge on other fronts, respondents said.

 

The following are estimates for yield levels for the 10-year benchmark bond at the end of April:

 

ORGANISATION	YIELD
Bank of Baroda	6.50%
CSB Bank	6.30%
HDFC Bank	6.40-6.50%
ICICI Securities Primary Dealership	6.40-6.42%
IDFC FIRST Bank	6.45-6.50%
Industrial and Commercial Bank of China	6.50%
Karur Vysya Bank	6.55%
Kotak Mahindra Bank	6.40-6.50%
PNB Gilts	6.42%
Private bank	6.45-6.50%
Shinhan Bank	6.35-6.60%
STCI Primary Dealer	6.35-6.40%
Sundaram Mutual Fund	6.40-6.55%
Tata Mutual Fund	6.45-6.55%
UCO Bank	6.60%

 

End

 

Edited by Ashish Shirke

 

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