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Informist, Wednesday, Sept. 2, 2026

 

By Aaryan Khanna

 

NEW DELHI – The uptrend in government bond yields is likely to continue in September as traders brace for tighter monetary policy from the Reserve Bank of India at the October meeting of the central bank's Monetary Policy Committee, dealers said. Mounting supply in the second half of the financial year ending March will also be on traders' minds heading into the end of September.

 

The yield on the 10-year benchmark 6.94%, 2036 gilt is seen at 7.00% at the end of September, according to the median of estimates from 14 money managers, treasury heads, and economists polled by Informist. With members of the RBI's rate-setting panel indicating that high inflation may prompt repo rate increases, the 10-year yield rose 12 basis points in August to 6.95% by Monday. It ended at 6.98% Wednesday, the highest closing level in nearly three months.

 

Bond market participants have already factored in repo rate increases of 50-100 bps from the current level of 5.25% over the next year, with the 10-year gilt yield almost 175 bps above the repo rate. CPI inflation is expected to peak at 5.9% in the December quarter, well above the central bank's medium-term target of 4%. Crucial to this assumption will be whether August's retail inflation, to be released this month, would move towards 5% from July's 4.45% reading, respondents said. 

 

"I am more constructive on the long end due to better demand dynamics. Short duration may bear the brunt of the curve flattening with the onset of rate hikes," said Churchil Bhatt, senior executive vice-president, investment, at Kotak Mahindra Life Insurance Ltd. "There is always investor demand, but discretionary demand suffers in such an environment. Hence we expect yields to continue inching higher."

 

The early end of the RBI's special foreign currency non-resident (banks) deposit scheme led to a bunching of inflows, and some of the extra cash would be deployed in gilts, capping yields as they head to three-month highs. The central bank Wednesday said FCNR(B) inflows under the scheme totalled $127.23 billion between Jun. 8 and Aug. 31, beating all expectations.

However, the deployment may be temporary as banks use the funds for credit or pick up money market instruments rather than the five- or 10-year gilts over an extended period, respondents said. After peaking in the first half of September at over INR 10 trillion, the banking system liquidity surplus is expected to decline in the second half due to scheduled drains such as the September-quarter advance tax outflows and monthly goods and services tax payments.

 

As long as liquidity remains in surplus, however, the 10-year gilt yield may resist rising past 7.05% as state-owned banks step in as buyers above the psychologically crucial 7.00% yield. Dealers fear the central bank may announce measures to mop up "excessive" liquidity through bond-negative measures, such as open market operation sales, though most see this as a tool to use in October rather than between two monetary policy decisions.

 

RBI Governor Sanjay Malhotra had said after the August meeting of the committee that the liquidity surplus in the banking system was not unusually high and would be short-lived. Tuesday, the RBI's net liquidity absorption -- an indication of the banking system liquidity surplus -- rose to INR 7.76 trillion. Amid this surplus liquidity, some respondents questioned whether domestic rate hikes would be effective in October and whether the rate-setting panel would only hike the repo rate in December, after the central bank had tightened liquidity conditions.

 

"Whether the RBI's MPC raises the repo rate in October or December is less important than the broader direction of policy. In our view, the probability of rate hikes in the coming months remains high," Sandeep Agarwal, head of fixed income at Sundaram Asset Management Co. Ltd., said. "Even if the MPC postpones a rate hike by a couple of months, buying interest is likely to remain subdued, as markets are already pricing in tighter monetary policy."

 

Agarwal prefers shorter-duration fixed income instruments, including six-month certificates of deposit and state government bonds with maturities of two to three years. Other respondents noted the tactical opportunity to pick up such instruments as surplus cash in the financial markets pulls yields down in September, before fading by November.

 

These purchases are not seen translating to the 10-year benchmark gilt, not least because global cues seem to suggest higher domestic yields are warranted. The 10-year US Treasury yield rose to 4.82% Wednesday, its highest since November 2023, narrowing its spread with the 10-year Indian government bond to under 220 bps. The potential narrowing of the spread between the two benchmark sovereign yields may lead to foreign portfolio investors trimming their holdings of Indian bonds in September unless domestic yields rise, respondents said.

 

A fresh round of strikes between the US and Iran in West Asia has pushed up near-month Brent crude futures to above $95 per barrel for the first time in over a month. Even if the conflict ebbs, uncertainty is likely to persist due to the inability of the two sides to reach a lasting peace deal six months after the war began with US-Israeli attacks on Tehran. The lowest estimate, given by Bank of Baroda, pegs the 10-year gilt yield at 6.85% by the end of September.

 

Bond supply is expected to mount in Oct-Mar after the Centre's kept its first half borrowing relatively low in the face of the war in West Asia. The seasonal increase in the supply of state government securities will also attract investor attention away from gilts. As more and more market participants play for interest accrual rather than capital gains, demand for gilts may stagnate even above 7.00% yield, respondents said. The median of 10 estimates in the Informist Poll pegged the 10-year gilt yield at 7.10% by the end of December. The most pessimistic view was 7.25%, which may bear out if fiscal pressures translate to higher borrowing in FY27.

 

Following are the estimates for yield levels of the 10-year benchmark 6.94%, 2036 bond at the end of September and December:

 

ORGANISATION	September-end	December-end
Bank of Baroda	6.85-6.95%	N.A.
Edelweiss Mutual Fund	6.90-7.00%	6.90-7.00%
HDFC Bank	6.90-7.10%	7.00-7.20%
ICICI Bank	6.85-7.05%	6.85-7.05%
IDFC FIRST Bank	7.00	7.10%
IndiaFirst Life Insurance	7.00-7.05%	7.15%
ICICI Securities Primary Dealership	7.00%	7.00%
Kotak Mahindra Bank	6.90-7.00%	7.05-7.15%
Kotak Mahindra Life Insurance	7.00%	7.10%
PNB Gilts	7.10%	7.00%
STCI Primary Dealer	7.00-7.10%	7.15-7.25%
Sundaram Mutual Fund	7.05-7.10%	N.A.
Tamilnad Mercantile Bank	7.00%	7.15-7.25%
YES Bank	7.05%	N.A.
Median	7.00%	7.10%

 

End

 

US$1 = INR 94.97

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

With inputs from Cassandra Carvalho

Edited by Rajeev Pai

 

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