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Informist, Monday, Oct. 6, 2025

 

By Srijita Bose

 

MUMBAI – Government bond yields are expected to fall this month after the Reserve Bank of India's Monetary Policy Committee last week opened the door for another rate cut in 2025. However, contrary to RBI Governor Sanjay Malhotra's comment that the 10-year gilt yield has scope to move further south, market participants are of the view that a higher supply of the benchmark bond in the second half of the financial year 2025-26 (Apr-Mar) could prevent the yield falling significantly.

 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.4750% by the end of October, according to the median of estimates of 12 money managers, treasury heads, and economists. Monday, the 6.33%, 2035 bond was trading around 6.50%, down 2 basis points since Wednesday, when the Monetary Policy Committee announced its decision to keep interest rates unchanged.

 

For the bond market, supply trumping demand in the second half is a major concern. Participants believe that despite a lower supply of longer-tenure bonds in the second half, the fall in yields of these bonds will be limited as states are expected to borrow more in the second half as compared to the first half of the year. The RBI has pegged states' borrowing at INR 2.82 trillion for Oct-Dec, but most respondents expect states' borrowing in the second half of the year to be higher.

 

In FY25, states had borrowed INR 7.69 trillion in the second half, more than double the INR 3.33 trillion they had borrowed in the first half of that year. Also, states have a tendency to borrow more than the amounts they indicate in their calendar. In the September quarter of FY26, states had raised a total of INR 3.00 trillion, against the INR 2.80 trillion indicated in the borrowing calendar.

 

Along with states' borrowings, a higher supply of the 10-year gilt at each auction in the second half of the financial year, at INR 320.00 billion, will also be difficult for the market to absorb, respondents said. This is seen limiting the fall in the 10-year yield. The government issued a new 10-year bond Friday, at a coupon of 6.48%. The yield on the 6.33%, 2035 bond, the 10-year benchmark, is 6 bps higher than on the 6.48%, 2035 bond, the latest 10-year bond.

 

Market participants have also been cautious in building positions due to the uncertainty over future interest rate cuts. The Monetary Policy Committee has cut the repo rate by 100 bps so far in 2025, including a frontloaded cut of 50 bps in June. It has since delivered a pause in both August and September. At the recent meeting of the rate-setting panel, two external members--Nagesh Kumar and Ram Singh--were of the view that the policy stance should be changed to "accommodative" from "neutral". This hints at the possibility of more rate cuts. However, some respondents continue to hold the view that there is a fair chance the panel may choose to keep the repo rate unchanged at the next policy meeting.

 

Market participants say a slowdown in growth in the December and March quarters would be crucial to sway the Monetary Policy Committee towards a rate cut. According to many respondents, growth could slow down if the tariffs imposed by the US on Indian imports remain at 50%. In the monetary policy statement, Malhotra said the rationalisation of the goods and services tax rates would not fully offset the impact of US tariffs. Most participants hope the two countries reach some sort of agreement before the next monetary policy meeting in December. The optimism is fuelled by the recent thaw in the relationship.

 

"If... we get an agreement with the US, then I don't think a cut will come," said Gaura Sengupta, chief economist at IDFC FIRST Bank. "It's only when downside risks to growth, you know, materialise that he will actually cut. Because if he had to cut for domestic factors, he would have done it now. The fact that he decided to give a hint, there is space, but stay on pause means he's waiting for something. So, either he's waiting for the trade deal clarity, or he's waiting for, let's say, what is the real impact of GST. Then only he will take that decision. So, it's not a done deal."

 

Despite the uncertainty on rate cuts and the higher supply of gilts maturing in up to 10 years, traders have been building positions at the short-end of the yield curve to better capture the risk-reward. Market participants see the yield curve steepening--shorter-tenure yields falling more than those on longer-tenure gilts--as some traders place bets on their expectations of more rate cuts by the RBI's rate-setting panel.

 

Shorter-tenure bonds are also expected to remain in favour due to the comfortable liquidity in the banking system after the announcement of a 100 bps cut in banks' cash reserve ratio to 3% of their net demand and time liabilites. The CRR cut, being implemented in four tranches, is expected to infuse INR 2.50 trillion of liquidity into the banking system. A 25-bp cut in the CRR that came into effect Saturday is expected to have infused INR 600.00 billion to INR 700.00 billion of durable liquidity into the system. This was the second of the four cuts announced in August.

 

"We expect yields to decline in a measured manner, with short-term yields falling faster than long-term yields, resulting in a steepening yield curve as the spread between them widens," said Sreejith Balasubramanian, senior vice-president and economist–fixed income, at Bandhan Asset Management Co. Ltd. "However, rather than bluntly maximising duration, we favour optimising exposure, particularly in the 6–12-year maturity bucket, to best capture the next phase of the bond market rally."

 

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

 

ORGANISATION	Yield (Oct-end)	Yield (Dec-end)
Bank of Baroda	6.50-6.60%	6.50-6.60%
HDFC Bank Ltd.	6.40-6.60%
ICICI Securities Primary Dealership	6.45%
IDFC FIRST Bank Ltd.	6.50%	6.40-6.60%
Karur Vysya Bank Ltd.	6.38-6.40%
PNB Gilts	6.43%
Private-sector bank	6.40-6.50%	6.25-6.50%
Shinhan Bank	6.45-6.57%
South Indian Bank Ltd.	6.35%
Tamilnad Merchantile Bank Ltd.	6.50%	6.40-6.50%
Union Bank of India	6.40%	6.30%
YES Bank Ltd.	6.50%
Median	6.475%

 

End

 

With inputs by Aaryan Khanna and Janwee Prajapati

Edited by Rajeev Pai

 

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