Banking Central | Bond market is caught in uncertainties

Bond market is giving mixed signals on interest rates

It wouldn’t be an exaggeration to say that February was a month of hesitation for India’s bond market — when where traders played safe, yields moved within a tight range, and policy cues dictated every minor shift. The 10-year government security (G-sec) yield barely moved, closing at 6.72 percent, just 3 basis points (bps) higher from January’s 6.69 percent.

Investors started the month on a hopeful note, betting on rate cuts and easing liquidity conditions. Foreign investors jumped in, banking system’s liquidity improved and the Reserve Bank of India’s bond-buying operations offered further support. But just as quickly, the mood turned cautious. Global events — rising US treasury yields, a cautious Federal Reserve, and geopolitical noise — kept traders from taking aggressive positions.

No rush for rate cuts

The RBI’s decision to cut policy rates by 25 basis points while maintaining a “neutral” stance summed up the predicament. A rate cut was expected but the lack of a clear dovish signal meant bond traders remained on edge. It message was clear —the central bank would not rush into an aggressive easing cycle, keeping yields from declining sharply.

The third week brought another jolt. President Donald Trump’s renewed tariff threats rattled global markets, pushing US treasury yields higher and dampening sentiment in India. But the RBI stepped in with a larger open market operation (OMO) purchase, offering Rs 40,000 crore instead of Rs 20,000 crore, offering a cushion to domestic bonds.

Banking Central

By the final week, the market was again in a holding pattern, waiting for GDP data to provide fresh direction. The upward revision in India’s growth forecast to 6.5 percent from 6.4 percent  may have been good news for the economy but for bonds, it was another sign that aggressive rate cuts weren’t coming anytime soon.

The bond market remains caught between competing forces. On the one hand, inflation has softened, with CPI falling to 4.31 percent in January — a positive for bonds. On the other, global uncertainties and the RBI’s cautious policy stance are keeping traders from making bold bets on lower yields.

For now, the market is waiting for clarity. Will inflation continue to moderate, giving the RBI room for further cuts? Will global risks — from US economic policy to oil price volatility — force a rethink on the monetary policy?

February’s torpid bond market reflects a broader uncertainty. The pieces are in place for yields to decline, but conviction is missing. Until there is a clearer policy signal, expect more of the same — cautious trading, narrow movements, and a bond market that remains in wait-and-watch mode.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)