SBI Ghosh says gilt mkt price discovery skewed, RBI communication may fix it
This story was originally published at 22:20 IST on 12 August 2025
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NEW DELHI – Price discovery in the government bond market has become skewed since the June monetary policy decision as all market participants are selling bonds, rather than the usual balance being struck between two halves of the market, State Bank of India Group Chief Economic Adviser Soumya Kanti Ghosh said in a research report. The yield curve is a public good, but yields may not ease until there is clarity on tariffs imposed by the US on India, he said.
The Reserve Bank of India's Monetary Policy Committee cut the policy repo rate by 50 basis points in June to 5.50%, more than the market had expected, but changed its policy stance to 'neutral' from 'accommodative'. Since then, the yield on the 10-year 6.33%, 2035 bond has risen 38 bps to 6.49% Tuesday, with the benchmark yield at its highest closing level since early April. The situation has only worsened since the August policy review, where the MPC maintained status quo– the 10-year yield is up 16 bps in the past week.
"However, after the announcement of the June policy, almost all market participants are selling / behaving in the same manner. This is surprising and resulting in a skewed price discovery despite headline inflation at 8-year low," the research report said. "Perhaps a central bank communication can assuage the market expectations." India's CPI inflation in July fell to 1.55%, the lowest print since June 2017.
Bond traders considered RBI Governor Sanjay Malhotra's comments after both the policy decisions as keeping the bar extremely high for further policy easing. This led to a spurt of profit booking and then eventual rise in bond yields as the market absorbed debt supply weekly, with muted expectations of positives from the monetary policy.
Ghosh said the MPC's deliberations on rate cuts in August could be influenced by both domestic factors and pressures coming in from overseas, with data until September unlikely to give a clear picture of the impact of the US tariffs on the Indian economy. India's exports to the US are exposed to a 25% tariff since Aug. 7, and US President Donald Trump has issued an executive order imposing an additional 25% tariff on Indian goods from Aug. 27 due to its import of Russian oil.
"We believe that the current spike in bond yields indicate that the MPC's decision to go for a pause on rate decisions could be owing to volatile atmosphere engulfing the economy," the report said.
Ghosh said the undershoot in inflation that was earlier seen transitory may be gaining persistence after the July CPI print and that monetary policy seems to be under-reacting to disinflationary trends. This caution in policy adjustment could prolong "suboptimal growth-inflation outcomes", the SBI economist said.
Core CPI inflation, which excludes volatile items like food and fuel, fell to 4.1% in July from 4.4% in June, according to an Informist calculation. SBI Research pegged it at 3.94%, the first reading below 4% in six months. Gold prices have been a large contributor to the rise in core inflation as prices have spiked on year. Excluding gold prices, core CPI inflation was at 2.96% in July, the research report said.
"On the projections side, in-house estimates point to a lower inflation print vis-a-vis the RBI's projection. However with August inflation print likely to top 2% and be closer to 2.3%, a rate cut in October looks difficult. Even a rate cut in December looks a tad difficult if growth numbers for Q1 (Apr-Jun) and Q2 (Jul-Sept) are taken into consideration," Ghosh said. The Apr-Jun GDP data is scheduled for Aug. 29, while the September quarter print will be released end-November. End
Reported by Aaryan Khanna
Edited by Akul Nishant Akhoury
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