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Informist, Tuesday, Nov. 4, 2025

By Aaryan Khanna

NEW DELHI – Government bond traders expect macroeconomic data in November to clear the fog on further rate cuts in India. The jigsaw puzzle of domestic data and offshore cues may keep bond traders interested enough in a rate cut to help gilt yields drift slightly lower than current levels, but unlikely to break the current trading range until theories are confirmed by the Reserve Bank of India's Monetary Policy Committee at its meeting in the first week of December, dealers said.

The yield on the 6.48%, 2035 gilt is seen at 6.45% by the end of the month, with the bond likely to become the most widely tracked 10-year benchmark gilt by then, according to the median of estimates of 11 money managers, treasury heads, and economists. The bond ended at 6.47% on Oct. 31 and on Tuesday. However, several respondents said the 6.33%, 2035 bond may continue to be the most traded bond in November. Three institutions tracking the outgoing 10-year benchmark bond see it ending November at 6.48-6.60%, from 6.53% Tuesday.

The most crucial data could come right at the last hour of trade in November, when India's GDP data for Jul-Sept is released at 1600 IST on Nov. 28. Traders see a print near the RBI's forecast of 7.0% growth enough to make the case for a rate cut, as Monetary Policy Committee members have pointed out benign inflation provides room to support growth. Even if the GDP reading is strong, traders will hope for a rate cut as senior RBI officials, including Governor Sanjay Malhotra, have said the forward trajectory of growth has been dampened by external demand conditions and could warrant support. On the CPI front, inflation in October is seen at a historic low of 1% or below, the lowest in the current series with base 2012.

"GDP print could, at the margin, be a positive trigger for a rate cut," Akhil Mittal, senior fund manager - fixed income, Tata Asset Management Ltd., said. "The activity in Q2 (Jul-Sept) was slightly slow. In case the global trade headwinds do not escalate any further, there could be a case for the RBI to cut the rates (in December)." Still, a GDP growth print above 7.5% may dash those hopes and send gilt yields up by 5 basis points or more, respondents said.

The only reason bond yields do not currently price in a certain rate cut is the overhang of an India-US trade deal that could reduce the tariffs on domestic exports to the US from the current 50%. The two sides seem closer to sealing the deal than ever before, as of late October. The uncertainty over the deal has both dulled trading volumes in the market and increased volatility, a phenomenon likely to persist in November.

A trade deal with the US will boost growth and sentiment and may dissuade the Monetary Policy Committee from cutting the policy rate any further after its 100-basis-point rate reduction from February to June. This will also likely dissuade traders from betting on a rate cut. If a majority of policymakers are not convinced in December, a further rate cut may not happen in the current cycle at all and the repo rate may bottom out at 5.50%, respondents said. This is because February will bring with it higher inflation – the RBI forecasts Jan-Mar and Apr-Jun CPI inflation at 4.0% and 4.5% respectively, from an average 1.8% in the December quarter.

With rate cut hopes wavering in October, gilt yields had been trending higher before the central bank rejected all bids for INR 110 billion of the 6.28%, 2032 bond at an auction Friday. This was seen as an immediate signal of discomfort from the RBI and the government on the rise in yields. However, traders expect gilt yield to drift higher as the routine auctions go through this month, unless the RBI follows up with further action. The Centre has already marginally cut its gross borrowing despite widespread expectations of it missing its tax collection targets in FY26.

The market is abuzz about the possibility of the RBI buying bonds through open market operations to add durable liquidity to the banking system amid steady outflows from its foreign exchange operations to protect the rupee and robust credit offtake. The measure would aid gilts with maturities up to 15 years, the projected target of the central bank's buying, rather than long term bonds. However, most of the respondents do not expect the RBI to purchase bonds until at least December as two tranches of the cut in banks' cash reserve ratio will add over INR 1.3 trillion of durable liquidity this month, split between the beginning and end of November.

As traders juggle their bets on the domestic factors, developments in the US continue to sway expectations. US Treasury yields have risen over the past week as US Federal Reserve Chair Jerome Powell pushed back against market expectations of a December rate cut. This is likely to keep inflows into India's gilt market muted in November, though significant sales are not seen from the current record investment. Foreign portfolio investors' holdings of fully accessible route gilts, which have no bar for foreign investment and are listed in global bond indices, has risen to INR 3.17 trillion after these investors added INR 133 billion of these bonds to their portfolios in October, the most since March. FPI flows are unlikely to have a significant impact on the 10-year gilt yield in November, respondents said.

Traders are not too keen on being aggressive on the 6.48%, 2035 bond in particular even as they build their portfolios with the new 10-year benchmark. The bond may well be a laggard as other bond yields ease by the end of the month, because it is already "rich" and enjoys a yield 5-6 bps lower than the most-traded 6.33%, 2035 bond despite being illiquid, respondents said. Another thing working against the newer 2035 bond is that its yield has not risen in line with other papers including the five- and 15-year benchmark gilts, making those bonds a better value to reverse the losses. This may limit the downside in the gilt to 6.40%, 7 bps lower than its close Tuesday, they said.

Instead, several banks prefer to bet on a potential rate cut, the next big positive, through buying more rate-sensitive gilts maturing in five years or below. The five-year benchmark gilt's yield is also trading around 35 bps higher than the lows it had hit in June, making it a prime target for traders especially as they do not see the risk of a rate hike in the next 12 months.

On the other hand, several sections of the market have soured on picking up long-term bonds, in contrast to a month ago when the reduction in their share of Oct-Mar gilt supply was driving up prices. Not only have traders burnt their fingers on betting on the movement in investor-dominated papers maturing in 30-50 years, but the immediate positives in the segment seem to have run out. Even after the reduction in supply by the Centre and state bond borrowing being below target so far in Oct-Dec, poor demand from life insurers, muted inflows into mutual funds' gilt schemes, and the shift of pension funds to equities from fixed income have ensured the demand side of the equation remains structurally shaky, respondents said.

"Possibly some softening in view of the RBI policy and rate cut anticipation," Poonam Tandon, chief investment officer at IndiaFirst Life Insurance Ltd., said. "But supply would keep longer end of YC (yield curve) steep."

All in all, a wide gamut of push and pull factors are likely to influence gilt yields and the decisions of traders, but none of these are seen providing a decisive break to the narrow trading range of 6.42-6.50% that the 6.48%, 2035 has settled into since its issuance following the October policy status quo, respondents said. With nothing due from the RBI in November and the monetary policy outcome lined up in the last month of the calendar year, those central bank actions may remain the market's focus even in this month.

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

End

With inputs from Srijita Bose and Cassandra Carvalho

Edited by Ashish Shirke

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