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Informist, Tuesday, Dec. 2, 2025

 

By Aaryan Khanna

 

NEW DELHI – The Reserve Bank of India's actions by way of an interest rate cut or open market operation purchases of bonds will keep the 10-year benchmark 6.48%, 2035 gilt anchored near 6.50% by December-end, market participants said. In the absence of such action, the benchmark yield may shoot up to 6.75% levels, last seen in March.

 

The yield on the 6.48%, 2035 gilt is seen at 6.51% by the end of the month, with the bond likely to become the most-traded 10-year benchmark gilt by then, according to the median of estimates of 12 money managers, treasury heads, and economists. The bond ended at 6.51% on Nov. 30 and at 6.53% Monday. 

 

Bond yields have been volatile in the run-up to the RBI's three-day Monetary Policy Committee meeting that starts Wednesday. Traders come into the meeting with divided views on whether the panel will cut the policy repo rate by 25 basis points from the current 5.50% or pause as it has done for the last two meetings. Inflation was at a record low of 0.25% in October and RBI Governor Sanjay Malhotra had said on Nov. 24 that the central bank had received no signal from incoming data since its last policy outcome that the scope for easing monetary policy had reduced.

 

However, data since then has shown India's September quarter GDP grew at a six-quarter high of 8.2%, with several traders now of the view that the panel would keep its powder dry in the face of high growth. The global uncertainty, particularly on the India-US trade deal that been in limbo for months, also makes a case to maintain status quo. In the continued absence of a deal to reduce the 50% tariffs on India's exports to the US, the rupee fell to a record low of 89.9525 a dollar Tuesday.

 

"Despite low inflation, the high real GDP growth shows that things are continuing without cutting rates, so the pressure is not there on the RBI and the market's hopes have faded," said Arvind Kanagasabai, head of treasury at Tamilnad Mercantile Bank. "If the RBI announces a large OMO calendar, we could see the 10-year yield come down to 6.40% as well, but without it the yield can go to 6.75%." The 10-year benchmark yield has not topped 6.66% in the current financial year that began April.

 

Some traders have exited their bets on a rate cut saying that while the local currency's weakness might not be the primary cause for a hold on rates, but the RBI would not want to exacerbate the fall as it continues to sell dollars to stem the bleeding of the rupee. Others took heart from comments from RBI officials, including Deputy Governor Poonam Gupta, at the last policy meeting that while Jul-Sept growth will be strong, the growth trajectory could be weaker starting in the December quarter due to external risks.

 

Comments after the policy decision will also be equally weighed. The 10-year gilt yield could fall to 6.40% if the MPC cuts rates and reiterates further room to ease, but comments hinting that its space for policy easing has run out could keep the yield near 6.50%, respondents said. A pause on rate cut while keeping the door open for more could still see the benchmark yield trending higher towards 6.60%. Then, the saving grace would be whether the RBI commits to buying bonds in the open market through auctions, either at the policy announcement or later this month.

 

"They may not take any action this month but they will definitely announce something like an OMO," said Vijay Sharma, senior executive vice-president at PNB Gilts Ltd., a primary dealership. "That should be enough to keep yields marginally lower from here by the end of December."

 

Market estimates of liquidity infusion by March range between INR 1 trillion and INR 2.5 trillion, primarily through the RBI buying gilts in the open market. The RBI is committed to keeping banking system liquidity in a surplus of around 1% of banks' net demand and time liabilities, equating to about INR 2.3 trillion. Systemic liquidity has been on a steady decline on a durable basis since September due to the RBI's dollar sales to protect the currency. The RBI has sold around $35 billion dollars in the spot market in the first eight months of the fiscal, according to ANZ Bank India estimates, equating to a rupee liquidity drain of INR 3 trillion. The central bank's cash reserve ratio cut over four tranches between September and November has brought down the regulatory minimum to 3% and given banks INR 2.6 trillion in durable liquidity. A further cut from here is unlikely, bankers said.

 

Adding to that, banks' credit-deposit ratio as on Nov. 14 was 80.3%, suggesting they were using their entire resource base and more to lend after the 3?sh reserve ratio requirement and 18% statutory liquidity ratio minimum holdings. Thus, the only way to fund fresh credit growth is either through bank borrowing, an aggressive rush to draw deposits or the RBI infusing liquidity. The easiest way to do so would be through open market bond purchases as a dollar/rupee buy/sell swap may put additional pressure on the exchange rate, respondents said.

 

Durable liquidity has shrunk to INR 3.61 trillion on Nov. 17 from nearly INR 6 trillion in July, the latest data showed. It is likely to plunge again in December as companies and individuals pay dues for advance tax payments mid-month. In the March quarter, a seasonal increase in currency-in-circulation has led to calls for the sizeable quantum of liquidity infusion. 

 

"We are past the point of the CRR (cash reserve ratio) cuts and tax outflows will again drain liquidity in December, raising the possibility of OMOs this month itself," said Madan Sabnavis, chief economist at Bank of Baroda. "They may not announce it at the policy itself, but I certainly see the scope for OMOs in December and then heading into Jan-Mar."

 

Global factors including the US Federal Open Market Committee's rate decision is also being watched but it will have a muted impact on domestic yields as foreign banks and investors reduce their trading near the year-end, when they close their accounts, poll respondents said. A potential rate cut in the US is largely priced in and may only have a limited impact on US Treasury yields as well. However, a widening of the spread between the safe haven asset and India's gilt yields could boost inflows, especially heading into January when India's fully accessible route bonds are expected to be added to Bloomberg's flagship Global Aggregate Index.

 

The index inclusion is likely to lead to inflows of $25 billion to $30 billion. However, the purchases from FPIs will likely be long-drawn and continue into 2027, limiting interest of traders looking to front-run these flows. As such, December's gilt moves will largely be guided by domestic factors and the RBI's actions in particular, respondents said.

 

The following are estimates for yield levels of the 10-year benchmark 6.48%, 2035 bond at the end of December:

 

ORGANISATION	Yield
Bank of Baroda	6.50-6.55%
HDFC Bank	6.50-6.60%
ICICI Bank	6.55%
ICICI Securities Primary Dealership	6.50%
IDFC FIRST Bank	6.50%
Karur Vysya Bank	6.38-6.40%
Kotak Mahindra Bank	6.35-6.45%
PNB Gilts	6.49%
Shinhan Bank India	6.47-6.55%
STCI Primary Dealer	6.50%
Tamilnad Mercantile Bank	6.40-6.75%
UCO Bank	6.58%
Median	6.5050%

 

End

 

US$1 = INR 89.86

 

With inputs from Pratiksha and Cassandra Carvalho

Edited by Vandana Hingorani

 

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