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Informist, Friday, Aug. 1, 2025

 

By Aaryan Khanna

 

NEW DELHI – The lack of a sizzle out of the Reserve Bank of India's Monetary Policy outcome next week is likely to keep bond yields adrift near current levels by the end of August. Consistent bond supply may prevent yields from coming down quickly, but a sharp rise is also not expected as the 10-year yield offers an attractive return over banks' cost of funding.

 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.34% by the end of August against 6.37% Friday, according to a median of 11 money managers, treasury heads, and economists. It also closed at 6.37% on Thursday, Jul. 31, against an expected 6.28% in an Informist poll. The benchmark yield rose by 5 basis points in July.

 

The three-day MPC meeting will end on Wednesday, and the panel is widely expected to hold the repo rate at the current 5.50?ter 100-basis-point cuts between February and June. Instead, bond yields will take direction from RBI Governor Sanjay Malhotra on the outlook for growth and inflation to gauge whether the MPC is likely to cut rates later in the year, respondents said. Malhotra's remarks on the MPC having limited scope for rate cuts had pushed up gilt yields after the last monetary policy review in June, despite the larger-than-expected rate cut and liquidity measures announced by the central bank. Now, traders hope the governor will leave the door open to further policy easing, as he has been in public remarks between the two MPC meetings.

 

A reiteration of a sanguine outlook on growth and worries on inflation may drive yields up to as high as 6.45%, some respondents said. On the other hand, an unexpected rate cut by the MPC next week is likely to pull down the 10-year yield to 6.20%, which may sustain till the end of the month, they said.

 

This is likely to be by far the most important domestic trigger for rates through the month, at a time when the market is lacking firm cues in either direction. CPI inflation is seen sub-2% for July, and has largely been factored in. India's GDP growth data for the June quarter is scheduled on Aug. 29, and is likely to lead to volatility in gilt yields as the month closes, respondents said.

 

Scope for a larger downmove in yields appears dim at a time when the market does not expect a rate cut, and a four-step cash reserve ratio cut will begin adding further liquidity into the banking system starting September. This makes it unlikely that the RBI will buy bonds in the open market to infuse liquidity, as it did between January and May. Consequently, traders are likely to continue demanding higher yields to absorb fresh supply.

 

"Banks by now would have replaced most of the stocks they sold through OMOs (open market operations) to the RBI," said Vijay Sharma, senior executive vice-president at PNB Gilts Ltd, a primary dealer. "All incremental supply will create pressure. As of now it has not been witnessed in the auction cutoffs, but the days are not too far unless we witness some discomfort from RBI about rising yields."

 

Still, bonds remain attractive investments for both those keen to make trading gains and lock in current yield levels. The 10-year gilt is seen near the top of its trading range. Overnight money market rates are also seen at or below the policy repo rate for the next year, giving investors confidence to deploy cash in August at a time when credit growth is expected to remain soft.

 

On the global front, the imposition of tariffs by US President Donald Trump starting Aug. 7, including 25% on imports from India, is not likely to have a direct impact on gilt prices. However, it adds to a disinflationary global environment and may weigh on India's growth as well, by up to 40-50 basis points, according to a research report by State Bank of India earlier this week. Traders had already expected GDP growth in 2025-26 (Apr-Mar) to undershoot RBI's 6.5% forecast.

 

The scope of further rate cuts in the US may help pull down domestic gilt yields as well. After market hours Friday, US government data showed non-farm payrolls rose 73,000 in July, against a market consensus of 110,000 additions. The data for the previous month was revised down to 14,000 additions from an initial reading. US Federal Reserve Chair Jerome Powell will have the platform of the closely watched Jackson Hole conference in August if he seeks to signal rate cuts are coming after a year starting September, respondents said.

 

"The debt flows will remain neutral as long as US yields keep on going up...people are waiting to see the impact of the tariff on their inflation," Gaura Sen Gupta, chief economist at IDFC FIRST Bank said. "We have a call for one more rate cut (in India). So it narrows the differential a bit more between India and the US. But I don't see it as a limitation because we just have one more rate cut until then."

 

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

 

Organisation	Yield
Bank of Baroda	6.30-6.35%
DCB Bank	6.25-6.35%
ICICI Bank	6.30-6.35%
ICICI Securities Primary Dealership	6.40%
IDFC FIRST Bank	6.35-6.40%
IndiaFirst Life Insurance	6.40
Kotak Mahindra Bank	6.30-6.40%
PNB Gilts	6.39%
Shinhan Bank India	6.30-6.38%
STCI Primary Dealer	6.30-6.35%
Sundaram Mutual Fund	6.25-6.35%
Median	6.34%

 

End

 

With inputs from Srijita Bose and Vidhushi RajPurohit

Edited by Deepshikha Bhardwaj

 

 

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