Aided by improving macros, bond yield remains range bound

Bonds

Yield on government securities, especially the 10-year benchmark bond, moved in a narrow range of 6.70-6.80 percent in the last few months, despite global uncertainties which affected the Indian Rupee and equities market.

Experts attribute this to better macroeconomic conditions and the downward trajectory of inflation. Higher demand from long-term investors such as EPFO, pension funds and insurance companies also help bond yield to remain rangebound.

“Indian government bonds have been bolstered by robust domestic macroeconomic factors, such as the government's emphasis on fiscal consolidation, sustained demand from FPIs, and a decline in consumer inflation,” said Mataprasad Pandey, Vice-President of Arete Capital Service.

Experts further said that anticipation of the rate cut by the Reserve Bank of India (RBI) in February after last year's monetary policy decisions, including the one in December 2024 may have added further support to discount rates on the bond. Discounting rates means adjusting yields on the bond by buying or selling in the market.

The central bank in the February monetary policy delivered a rate cut of 25 basis points (Bps) due to declining inflation and expectation of recovery in growth in coming quarters.

“These growth-inflation dynamics open up policy space for the MPC to support growth, while remaining focused on aligning inflation with the target. Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points to 6.25 per cent,” RBI Governor Sanjay Malhotra had said at the time.

After the rate cut by the RBI, bond yield rose 5 bps in the absence of liquidity measures in monetary policy announcements made by RBI.

In the last 4-5 months, the currency and equities markets have been highly volatile. The Indian Rupee market and equities have seen a sharp dip due to various global factors such as India’s sluggish growth in the second quarter of the current financial year, hint of fewer rate cut by the US Federal Reserve in 2025, and tariff imposition by the US on Mexico and Canada.

Due to these reasons, the Indian rupee touched a low of almost 88 against the USD on February 10, though intervention by the RBI in the spot and forward markets is said to have helped recover losses.

Similarly, Indian equities also remained negative for most of the days in the last few months.  In the last three months, the Sensex has fallen to 76,319.14 on February 12, from 80,248.08 as on December 2, 2024.

Going ahead, experts are of the view that bond yields are likely to trade in the narrow range because there are few auctions left for the current financial year.

Umesh Kumar Tulsyan, Managing Director of Sovereign Global Markets, a New Delhi-based fund house said that as on date, there are only three auctions remaining for government of India dated securities valued at Rs 1.05 lakh crore, which is 16 percent of the total amount in the borrowing calendar of the current fiscal year.

“We expect the market to be range bound between 6.60-6.75 in the coming weeks,” Tulsyan added.