Informist Poll
India-Pakistan tensions to drive 10-year gilt's path in May
This story was originally published at 22:24 IST on 2 May 2025
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By Srijita Bose and Aaryan Khanna
MUMBAI/NEW DELHI – The mounting tensions between India and Pakistan are expected to heavily influence the yield on the 10-year benchmark gilt in May even as other domestic cues are seen remaining positive. According to the median of estimates by 13 money managers, treasury heads, and economists polled by Informist, the yield on the 6.79%, 2034 bond is seen at 6.30% at the end of May.
On Friday, the bond closed at 6.3538% yield after it slid 22 basis points in April--the most in a month since May 2020. In April, yield on the 10-year benchmark had fallen below 6.30% but rose to 6.36% by the end of the month as tensions between India and Pakistan flared up following the deadly Apr. 22 attack in Pahalgam.
While most participants in the poll were hopeful of the situation cooling down by the end of May--which would allow bond yields to fall more as focus shifted to the easing of monetary policy by the Reserve Bank of India--any escalation could push yields up to 6.45%.
"Geopolitical risk is a live risk right now...but at the same time, (it is) very difficult to call out when it (new developments) will happen," said Dwijendra Srivastava, executive vice president and chief investment officer – debt, Sundaram Asset Management Co. "If it turns out to be a longer war, something like Kargil and all, definitely (gilt) yields will harden by maybe 20, 25, or 30 bps because people will start building in various scenarios."
Participants, however, said market conditions created by the RBI were extremely favourable and not supportive of a sustainable rise in yields. The central bank has already promised to purchase INR 1.25 trillion of gilts by May 19, larger than what was expected. Durable liquidity is also set to be further bolstered by the transfer of the central bank's surplus to the Indian government in the final week of May. Economists widely expect the surplus to be around INR 2.5 trillion, which would be a record. While the surplus would not immediately boost liquidity conditions, it would aid spending by the government and will be priced-in by the bond market within the month, respondents said.
The continuously improving liquidity conditions are expected to allow traders to place larger bets on interest rate cuts by the RBI and add to their gilt portfolios. This is seen driving down the benchmark yield to as low as 6.20%.
The RBI's Monetary Policy Committee is widely expected to cut the repo rate by 25 bps to 5.75% at its meeting in the first week of June and follow it up with a similar reduction in August. With a rate cut next month already priced in by bond dealers, yields may rise if any risks to the same emerge ahead of the Jun. 4-6 meeting, respondents said.
Traders see gilts maturing in up to seven years gaining the most from higher demand due to comfortable liquidity conditions as investors remain wary of long-duration papers due to the geopolitical tensions. However, some market players are of the opinion that absolute gains on longer term bonds may be more attractive.
"If I look at historical spreads, then longer end looks nice...because of the steepeners. But I don't know how much of it will play out in the yields...around 10-15 year looks more of an insured bet," said Akhil Mittal, senior fund manager - fixed income, Tata Asset Management Ltd.
To be sure, a 40-bps fall in the 10-year bond yield over the last two months means foreign portfolio investors are not seen favouring Indian sovereign debt at the moment. Moreover, passive inflows from the inclusion on Bloomberg's emerging market bond index are only a trickle and FPIs sold over INR 111 billion worth of index-eligible gilts in April. Still, India's position as a frontrunner to sign a trade deal with the US may bolster its allure in May.
With inflation risks having receded appreciably--the outlook for both food inflation and crude oil prices is benign--the positives may outweigh the uncertainties traders are currently pricing in, respondents said.
The following are estimates for yield levels for the 10-year benchmark bond at the end of May:
| ORGANISATION | YIELD |
| Bank of Baroda | 6.30-6.35% |
| CSB Bank | 6.20-6.29% |
| DBS Bank India | 6.30% |
| Industrial and Commercial Bank of China | 6.30% |
| IDFC FIRST Bank | 6.30% |
| IndiaFirst Life Insurance | 6.30% |
| Karur Vysya Bank | 6.30-6.32% |
| Private bank | 6.33% |
| PSU bank | 6.25-6.45% |
| STCI Primary Dealer | 6.30-6.45% |
| Sundaram Mutual Fund | 6.30-6.40% |
| Tata Mutual Fund | 6.25% |
| UCO Bank | 6.24% |
| Median | 6.30% |
End
Edited by Akul Nishant Akhoury
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