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Informist, Tuesday, Jul. 1, 2025

 

By Cassandra Carvalho and Aaryan Khanna

 

MUMBAI – With the Reserve Bank of India's Monetary Policy Committee frontloading rate cuts last month, the bond market is likely to shift its focus to the US for signs of further easing in monetary policy, market participants said. With a view that domestic rate cuts may have hit a pause, but few risks of a policy reversal, traders see gilt yields stagnating in July.

 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28% by the end of July against 6.29% Tuesday, according to a median of 15 money managers, treasury heads, and economists. It closed at 6.32% on Monday, against an expected 6.20% in an Informist poll. The benchmark yield rose by 9 basis points in June.

 

After a jumbo 50 basis points cut in the repo rate in June, bond traders see little to look forward to on further policy easing in the near term, especially with the RBI's announcement of a 100-bp cash reserve ratio cut for banks set to add more liquidity Sept-Nov. They will be closely tracking inflation and GDP growth data for indications on the possibility of another rate cut. However, global conditions seem more conducive for yields to fall, with focus on the US Federal Open Market Committee's rate decision at the end of the month.

 

Weakening data on growth and consumer confidence in the US coupled with pressure from US President Donald Trump to lower rates may push the FOMC to cut rates sooner, bond market participants said. A fall in US yields is likely to reflect in the 10-year benchmark gilt yield hitting 6.20% on the downside, though the level may not sustain, they said. Already, foreign portfolio investors have taken note of the widening yield differential between US and India bonds, and bought over INR 100 billion of gilts through the fully accessible route between Friday and Tuesday. A breakthrough in trade negotiations between India and the US ahead of the Jul. 9 deadline for high tariffs on domestic exports may also be an added positive for foreign investors, respondents said.

 

Fears of geopolitical tensions remain, with the India-Pakistan and Israel-Iran skirmishes in the past two months being key flashpoints. Brent crude oil prices are expected to remain below $70 a barrel after a US-brokered ceasefire in West Asia and increasing crude supply, limiting the impact on domestic bond yields, respondents said.

 

As for liquidity management, the RBI's steps in July will be keenly watched by traders who are still confused by the central bank's decisions. The first variable rate reverse repo operation in seven months was conducted last week and has so far not disrupted the overnight market. Still, a rollover of the auction and consistent liquidity mop-ups through July would likely lead to bond yields trending higher. However, inflation concerns are far from traders' minds, with the June CPI print – to be released mid-July – seen lower than the headline inflation of 2.82% for May.

 

"Traders will look at the RBI's actions on INR (rupee) liquidity in the coming weeks to gauge the central bank's comfort with overnight rates relative to the repo rate before committing to their investment decisions," said Sameer Karyatt, executive director and head of trading at DBS Bank India. "That said, domestic bond yields may see a minor rally, given the supportive global backdrop and lower inflation print in India."

 

With no rate cuts expected, the shape of the gilt yield curve is not expected to change much and will retain its steepness, respondents said. Incremental positives for short-term bonds are unlikely as benign inflation is already priced in and the government's quick pace of spending until June, as well as tad lower-than-expected Treasury bill calendar for Jul-Sept, suggest further buybacks are unlikely. The government had bought back INR 496 billion worth of FY27 gilts across two auctions in June.

 

Also, some respondents said the overhanging fear of the RBI moving overnight rates to the repo rate of 5.50% from hovering around 5.25% is likely to fade should the RBI offer nothing more adverse. At the same time, longer-term bonds offer some tactical relative value, but spreads are unlikely to compress in a durable manner. Supply of 30-50 year gilts is likely to exceed investors' demand for the rest of the government's borrowing calendar until September, and traders are likely to demand a premium on the paper going ahead.

 

"More recently, of course, with the VRRR, there has been some adjustment (in the yield curve), but I think this is a very, very fleeting response," said Sakshi Gupta, principal economist at HDFC Bank. "So, I would expect the yield curve to remain steep. I think that any flatness in the curve is likely to be more or less short-lived... because liquidity surpluses will continue to increase and remain very comfortable as we move into the third quarter (Oct-Dec)."

 

With a domestic-only perspective likely to bring down market activity, traders increasingly look outside for triggers. Still, uncertainty on monetary policy reigns across both fronts, and as a counter, lack of fiscal concerns in India are likely to keep bonds well-bid through July.

 

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

 

ORGANISATION	Yield
Bank of Baroda	6.25-6.35%
CSB Bank	6.25%
Federal Bank	6.30-6.45%
HDFC Bank	6.25%
ICICI Bank	6.25%
IDFC FIRST Bank	6.25-6.30%
IndiaFirst Life Insurance	6.35%
Karur Vysya Bank	6.22-6.23%
PNB Gilts	6.35%
Private sector bank	6.25-6.35%
Shinhan Bank	6.20-6.50%
State-owned bank	6.25%
STCI Primary Dealer	6.25-6.35%
Tata Mutual Fund	6.25-6.30%
UCO Bank	6.20%
Median	6.28%

 

End

 

US$1 = INR 85.52

 

With inputs from Srijita Bose and Vidhushi RajPurohit

Edited by Ashish Shirke

 

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