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Informist, Monday, Sept. 1, 2025

 

By Aaryan Khanna

 

NEW DELHI – After a rout in August, government bond yields are expected to settle into a range amid a lack of fresh cues for most of September. The government's borrowing calendar for Oct-Mar and the build-up to the Reserve Bank of India's Monetary Policy Committee outcome on Oct. 1 may lead to sharp swings in yields near the end of the month.

 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.61% by the end of September against 6.59% Monday, according to a median of eight money managers, treasury heads, and economists. It also closed at 6.57% on Friday, Aug. 29, against an expected 6.34% in an Informist poll. The benchmark yield rose by nearly 20 basis points in August, leading traders to hit multiple stop-losses and the creation of a new trading range.

 

The biggest concern for the market currently is supply trumping demand, auction by auction. After the RBI's last open market bond purchase in May pushed the 10-year yield to a late-2021 low in early June, it has risen for three straight months as investors have demanded higher returns to pick up fresh issuance. This was exacerbated when the MPC changed its stance to neutral in early June despite a 50-basis-point rate cut, and more recent concerns of fiscal slippage after the government announced a goods and services tax rate rationalisation in mid-August.

 

This has come at a time when long-term investors are short on cash to add bonds to their portfolios. Rule changes for pension funds to invest more into equities and life insurers' flows locked up in bond forward rate agreements have all added to the problem. Moreover, states have borrowed around INR 760 billion more from the market since April than the year-ago period, vying for investors' attention amid rising spreads over gilts. The poor cut-offs at recent auction have added to the uncertainty in the market.

 

"We are shooting in the dark...I believe some reaction has happened," said Dwijendra Srivastava, executive vice-president and chief investment officer – debt at Sundaram Asset Management Co. "It's a demand-supply situation; if supply on the longer end reduces, some amount of downtick in yields could happen."

 

That hope comes from the government's borrowing plan for the second half of the fiscal year ending March, which is scheduled for release near the end of September. The Centre is not expected to announce any extra borrowing despite the finalisation of the GST rate changes. Investor feedback of poor appetite for bonds maturing in 30-50 years may bring down the supply share of these long-term bonds, bringing demand-supply dynamics into a greater sense of balance. In such a scenario, long-term bonds are expected to outperform the 10-year benchmark gilt.

 

Other positives also abound by September-end. Bond traders have already priced in the worst-case scenario of no further rate cuts after India's GDP growth suprised to the upside in the June quarter, rising to 7.8%, a five-quarter high. Heading into the policy, expectations can only be more positive from the commentary of RBI Governor Sanjay Malhotra, respondents said. The cash reserve ratio cut, set to add over INR 600 billion of liquidity to the banking system next week, may also be a temporary positive for gilt prices.

 

That said, respondents said that all bets are off if the RBI actually takes action to bring down yields during the month, respondents said. The most widely expected measure is that the central bank announces further open-market operations to buy bonds, which is unlikely at a time when both durable and frictional liquidity are in a massive surplus. Other expectations include an operation to buy long-term bonds and sell short-term gilts, or even commentary signalling a discomfort with the rise in yields. 

 

However, banks could step up purchases by September-end as they look to limit the losses from a markdown in the valuations of their gilt portfolios in the September quarter. The 6.33%, 2035 bond ended at 6.32% yield on Jun. 30, ending a quarter which universally led to banks announcing bumper treasury profits. The spread offered by the 10-year bond over the repo rate also looks attractive near 6.65%, offering banks a return of 115 bps over their funding costs.

 

"The market is in oversold territory, and we could see a pullback to around 6.54% (on the 10-year gilt yield) towards the end of the month because it is September, and banks could look to protect valuations," said Vijay Sharma, senior executive vice-president at PNB Gilts Ltd., a primary dealership. 

 

All in all, September could offer some solace from the tumult that August brought, especially as the first half of the financial year nears its end. However, if panic settles in and auctions continue to be poorly bid without intervention from the government or central bank, respondents do not rule another breakout upward. 

 

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

 

ORGANISATION	Yield
ICICI Bank	6.60-6.65%
ICICI Securities Primary Dealership	6.70%
IDFC FIRST Bank	6.60-6.65%
PNB Gilts	6.54-6.65%
Shinhan Bank India	6.52-6.67%
STCI Primary Dealer	6.50-6.60%
Sundaram Mutual Fund	6.45-6.60%
Tamilnad Mercantile Bank	6.75%
Median	6.61%

 

End

 

With inputs from Rizwan Ali, Srijita Bose, and Cassandra Carvalho

Edited by Deepshikha Bhardwaj 

 

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