MUMBAI: The Indian government’s 10-year bond yield dropped to its lowest level in three years on Monday, fueled by growing bets on an interest rate cut following surprise bond purchases by the Reserve Bank of India (RBI).
The benchmark yield closed at 6.6800 per cent, down from the previous session’s 6.7206 per cent, marking its lowest level since February 18, 2022.
Market participants speculated that the RBI’s unexpected secondary market bond purchases, combined with liquidity infusion measures, signal its intent to maintain a supportive monetary stance.
Analysts suggest that this could pave the way for a potential rate cut, especially if upcoming economic events align favorably.
“The 10-year bond yield could slide further to 6.50 per cent if the Federal Open Market Committee (FOMC) meeting, India’s federal budget, and the RBI policy outcome collectively support easing,” said an analyst.
The Federal Reserve policy decision is due on Wednesday, followed by India’s Union Budget on February 1, and the RBI’s monetary policy review on February 7.
Central bank purchases of bonds
Yields fall when bond prices rise, which occurs when the central bank purchases bonds from the market, reducing supply and driving demand higher.
This decline in yields reflects lower borrowing costs and often signals expectations of easier monetary policy ahead.
In the week ending January 17, the RBI purchased bonds worth Rs101.75 billion ($1.18 billion) in the secondary market, marking its first such operation in over three years.
These operations were complemented by daily liquidity injections through overnight repos, reinforcing the RBI’s accommodative stance.
Interestingly, the “others” category of investors, which includes the RBI, bought bonds worth Rs187 billion last week. Details on how much of this was purchased by the RBI will be revealed on January 31, adding to speculation about its strategy.
Traders are now closely watching India’s fiscal deficit and gross borrowing targets for the upcoming financial year, which will be unveiled in the budget.
Current estimates peg the fiscal deficit at around 4.5 per cent of GDP and gross borrowings in the range of Rs14 trillion to Rs14.50 trillion.
The combination of the RBI’s actions, expectations of fiscal discipline, and a favorable global backdrop could further ease yields, strengthening the case for a policy rate cut in February.
