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Informist, Wednesday, Apr. 8, 2026

 

By Aaryan Khanna

 

MUMBAI – The Reserve Bank of India's Monetary Policy Committee Wednesday effectively pushed back the market's fears of a repo rate hike in the next few months. RBI Governor Sanjay Malhotra's comments poured cold water on the fire, ensuring that even the most intrepid of traders could not aggressively bet on policy rates rising anytime soon. 

 

The six-member committee unanimously held the repo rate at 5.25% and retained the policy stance at 'neutral', in line with the consensus from economists. The commentary was measured and downplayed both growth and inflation concerns emanating from the war in West Asia, dealers said. The MPC pointed to strong economic activity till February and mitigating factors on inflation, including government measures. The panel said the initial supply shock caused by the disruption in supply chains could change to a demand shock in the medium term, effectively signalling an aversion to raise rates and potentially hurt growth.

 

Traders who were betting on a 25-basis-point rate hike as early as June pushed back those bets to December at the least, with CPI inflation seen climbing to 5.2% during Oct-Dec, according to the RBI's forecast. A section of the bond market had held onto bets that the MPC would signal tightening monetary conditions due to the surge in crude oil prices in March following the outbreak of war in West Asia. These fears had pushed up gilt yields to multi-year highs, but yields ebbed this week even before the two-week ceasefire was announced early Wednesday. 

 

"The policy was quite benign and balanced and that has given some direction on calming the market, which had already reacted to the news from West Asia," said Ashhish Vaidya, managing director and country treasurer at DBS Bank India. "The RBI has signalled a high bar to rate hikes while placing the risks in plain sight in their growth and inflation forecasts."

 

The MPC warned of upside risks from the CPI inflation forecast of 4.6% for 2026-27 (Apr-Mar), which several market participants see as conservative. The transmission of higher energy prices to the domestic market will eventually drive up inflation, with food inflation facing a double-whammy from higher input costs and an El Nino effect that could result in a weak southwest monsoon. Based on the central bank staff's latest estimate of a real rate of 1.4-1.9% – the nominal policy rate net of inflation – the repo rate should rise by at least 75 bps in FY27 to 6% to reflect a neutral rate.

 

Moreover, the bond market's joy on Wednesday was only half-driven by the MPC decision and may have had more to do with the collapse in crude oil prices after a ceasefire was announced by the US and Iran earlier in the day. Brent crude futures fell over 15% intraday and traded near $93-$95 per barrel during Indian market hours Wednesday. The 10-year benchmark 6.48%, 2035 gilt yield fell 15 bps to 6.90%, charting its best session since May 10, 2022. The yield on the more rate-sensitive 6.01%, 2030 bond plunged 30 bps to 6.40%, the most for a five-year bond in nearly five years. 

 

Still, RBI Governor Malhotra's comments in the post-policy press conference proved an additional tonic for the last leg down in yields, dealers said. He said real rates remain high currently, citing a 2% level that nets out February's CPI inflation from the policy rate, with too much uncertainty to consider the forecast for FY27 to calculate the real rate.

 

The governor also reiterated that interest rates in India could possibly stay low in the short-to-medium term despite the war due to India's resilient economy and a neutral monetary policy stance. Adding to the market's comfort was that even the worst-case inflation scenarios in most treasuries do not see average CPI inflation topping 6%, the upper end of the RBI's tolerance band, in FY27. 

 

"The Iran war will drive RBI's future trajectory. But it will be a wrong conclusion that a long Iran war necessarily means higher rates," Sandeep Yadav, head of fixed income at DSP Mutual Fund, said. "It could also mean lower growth, and thus lower rates. We believe it is too early to even talk about rate hikes."

 

CURVING BACK AROUND

The government bond yield curve has been "bear steepening" over the past month, a situation where short-term bond yields have shot up quicker than those on long-term gilts. The monetary policy has turned the situation on its head.

 

As the balloon of rate hike worries has been punctured, debt instruments maturing in up to five years will turn back into prized assets, dealers said. The RBI's promise Wednesday of ensuring ample liquidity is also seen keeping banks' funding costs low, making the spreads of short-term gilts over the 5.25% repo rate attractive. This is especially true for short-term debt instruments such as certificates of deposits and commercial papers, which DSP Mutual Fund favours to outperform short-term government securities. 

 

This will align well in helping absorb the government's borrowing programme of INR 8.20 trillion in the half-year ending September. The share of sub-7-year bonds in the government's borrowing has risen to 31.6% in Apr-Sept from 28% in Oct-Mar and less than 25% a year ago. The share of bonds maturing in over 30 years has shrunk to less than 25% in the current borrowing calendar from 29.4% in Oct-Mar and 35.0% in the calendar for the first half of FY26.

 

The 10-year gilt yield is seen traversing the 6.80-7.10% range over the next two months, lower than the two-year high of 7.13% it closed at on Thursday. The fiscal impact of the West Asia war will prevent gilt yields from falling as rapidly as overnight indexed swap rates, dealers said. The Centre has foregone annualised revenues of around INR 1.4 trillion from its excise duty cut on diesel and petrol and also plans an Emergency Credit Line Guarantee Scheme for micro-, small-, and medium-enterprises worth INR 2.5 trillion.

 

Meanwhile, long-term bonds will remain under supply pressure, with rate cuts out of the picture. While demand from banks, pension funds, and insurers is likely to increase year-on-year in FY27, the RBI's purchases of gilts are expected to fall well short of its Herculean deficit financing of nearly INR 9 trillion in gross purchases of central government bonds in FY26. This will keep the pressure on yields as the market absorbs a record INR 16.09 trillion borrowing programme for this fiscal.

 

"I'm not going to build my portfolio around a (rate) hike that may or may not come in six months and the RBI has erased any view of in the next three months," a senior treasury official at a large state-owned bank said. "In the meantime, questions about the fiscal side are still there, while investors look for carry in short-term bonds."

 

WARY OF OVEREXTENSION

At the end of the day, traders remain satisfied with the MPC outcome but are wary of buying into the central bank's commentary with macroeconomic risks persisting. Some bond dealers also indicated they would not have taken Wednesday's benign commentary at face value if not for the announcement of the ceasefire in the West Asia war earlier in the day.

 

Foreign investment into gilts is expected to be negligible in the face of the large supply as the yields offered by domestic bonds are not attractive compared to the high US Treasury yields, especially as the hedging cost for foreign investors has shot up now. At best, the rate-setting panel's equanimity should stem the bleeding, dealers said. FPI investment in fully accessible route bonds, which have no limits for foreign holdings, fell nearly INR 240 billion between Mar. 2 and Apr. 7 to INR 3.07 trillion, according to Clearing Corp. of India data.

 

"The MPC was well-worded in the face of the current geopolitical uncertainty and has been well received, especially by foreign investors worried the RBI would be in a hurry to act," said Shailendra Jhingan, treasury head at ICICI Bank Ltd. "At the same time, the market is always forward-looking and will be looking at potential rate hikes later in FY27, limiting the downside in gilt yields."

 

Even without the war that started in late February, traders had pencilled in a rate hike in mid-2027 as inflation was forecast to trend higher. Traders see enough of an acknowledgement from the MPC that the timeline for rate hikes has moved up. The panel's calm stance will keep bonds well bid, but investors are not worried about missing these levels for good amid persisting uncertainty.  End

 

US$1 = INR 92.58

 

Edited by Tanima Banerjee

 

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