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Informist, Monday, Jun. 2, 2025

 

By Aaryan Khanna

 

MUMBAI – With enthusiasm over monetary policy easing already contributing to a fall in government bond yields over the past two months, traders do not anticipate further positives to pop up in June. The Reserve Bank of India's Monetary Policy Committee is seen cutting rates again this week, with little impact on government bonds at all.

 

On Friday, the 6.79%, 2034 bond closed at 6.29% yield, in line with the Informist poll median of 6.30% for the end of May. The yield of the erstwhile 10-year benchmark bond is down around 30 basis points since March-end. The yield on the new 10-year benchmark, the 6.33%, 2035 gilt, is seen at 6.20% by June-end, according to a median of 15 money managers, treasury heads, and economists. It closed at 6.21% yield on Monday.

 

The Monetary Policy Committee is widely expected to cut the policy repo rate by at least 25 bps to 5.75% at the end of its three-day meeting on Friday, a fact reflected in bond yields already. Hopes of the terminal repo rate in 2025 dropping below 5.50% have tempered after the faster-than-expected GDP growth of 7.4% in Jan-Mar. Having already cut rates by 50 bps since February, the rate-setting panel may not be in a hurry to "frontload" monetary policy easing if economic activity is resilient.

 

"There's only a 5-10% chance of a 50-bp rate cut in the upcoming policy, 25 bps is higher probability," said Marzban Irani, chief investment officer – debt at LIC Mutual Fund. "But the market will still run forward to price in more rate cuts as inflation remains very low, and then there could be a period of stagnation for the next one to two years," he said. Irani was the most optimistic among the respondents on bond yields falling this month, projecting the 10-year gilt yield as low as 6.05% by the month-end.

 

No rate cut in June would be a massive disappointment for bond traders and the 6.33%, 2035 bond's yield could rise as high as 6.35%, respondents said. The chances of the committee pausing on rates is extremely unlikely as headline CPI inflation is running well below the RBI's 4% target, and members have noted that India's growth remains below potential. Moreover, easy liquidity conditions are sure to keep bankers interested in gilt investment even if yields rise.

Unlike the near unanimity on rate cuts, market participants have divergent views on whether the RBI would announce further liquidity easing measures. Some remain hopeful the RBI will continue to pump in cash to improve the transmission of the MPC's rate cuts. Others said that after INR 5.22 trillion worth of gilt purchases in 2025, and additions through a cash reserve ratio cut and foreign exchange swaps, the RBI is unlikely to announce another tranche of liquidity boosters immediately. That may lead traders to take profit.

 

"There is a surety that the rate cut is coming, but I'm not sure that yields will sustain at the lower end of the range," said Harsimran Sahni, head of treasury at Anand Rathi Global Finance. "The RBI could take a breather on additional liquidity measures at the current policy meeting, with liquidity already comfortably in surplus, and consider them at a later time, close to the August policy review."

 

A section of the market also expects the RBI to widen its Liquidity Adjustment Facility corridor asymmetrically, bringing the standing deposit facility rate at 50 bps below the policy repo rate from the current spread of 25 bps. This would be akin to a 50-bps cut in the policy rate, as the overnight rate will continue to hug the lower end of the LAF corridor with surplus liquidity in the banking system, dealers said.

 

Regardless of such changes, short-term bonds will continue to be the favourite of investors, including state-owned banks, as the government is seen continuing buybacks through the month. The 10-year benchmark gilt is seen largely unaffected by the buybacks, poll respondents said. The demand-supply mismatch may moderate as the RBI takes a step back from its record pace of gilt buys so far this year.

 

Besides the policy, bonds may trade in a narrow range due to lack of significant domestic triggers. Uncertainty on the global front remains, particularly with respect to geopolitics and the volatility in US Treasury yields around US President Donald Trump's tariff policies. Foreign portfolio investment in fully accessible route bonds fell by about INR 123 billion in May, with little impact on gilt yields, and their activity is expected to be marginal through June as well, respondents said.

 

Though many traders maintain a target of 6% on the 10-year gilt yield later in the year, June is not seen a big contributor to that journey. On the other side, no one looks to getting off the gravy train yet.

 

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

 

ORGANISATION	Yield
Anand Rathi Global Finance	6.18-6.28%
DCB Bank	6.15-6.25%
Federal Bank	6.15-6.30%
HDFC Bank	6.15-6.20%
ICICI Bank	6.15-6.30%
IDFC FIRST Bank	6.15-6.20%
IndiaFirst Life Insurance	6.20%
Karur Vysya Bank	6.18-6.20%
LIC Mutual Fund	6.05-6.10%
PNB Gilts	6.28%
Private sector bank	6.15-6.20%
Shinhan Bank India	6.00-6.20%
Standard Chartered	6.20%
Tata Mutual Fund	6.20-6.25%
UCO Bank	6.10%

 

End

 

Edited by Ashish Shirke

 

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