The yields on the benchmark 10-year bond will likely trade in the 7-7.25 percent range till the next monetary policy of the Reserve Bank of India (RBI) in June, say money market dealers.
The trading range for bond yields has been revised by traders after the RBI unexpectedly paused the rate hike on April 6, which helped yields to ease.
Prior to the policy, dealers were expecting the benchmark bond yields to trade in the range of 7.20-7.40 percent.
“The 10-year bond yield could shift to a lower trading range of 7-7.25 percent. Expect yields to come down more at the lower end of the curve, leading to bullish steepening,” said Sandeep Bagla, Chief Executive Officer (CEO), Trust Mutual Funds.
“The unexpected pause by RBI in the rate hike came as a pleasant surprise for the bond market in India. The decline in 10-year bond yields from 7.28 percent to 7.21 percent after the repo rate pause announcement yesterday indicates a softening trend for the bond yields,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.
RBI monetary policy action
The Monetary Policy Committee (MPC) chose to retain the repo rate at the same level and maintained the "withdrawal of accommodation" stance, highlighting the readiness to act should the situation so warrant.
The MPC kept the repo rate, or the rate at which it lends short-term funds to banks, at 6.5 percent.
The RBI also raised its growth projection for the country’s gross domestic product (GDP) in FY24 to 6.5 percent from 6.4 percent earlier. It marginally brought down the inflation forecast for FY24 to 5.2 percent from 5.3 percent, despite an assumption of the crude oil basket for India at $85 per barrel instead of $95 per barrel earlier.
Since May 2022, RBI has hiked rates by a total of 250 basis points (bps) as part of the fight against inflation. One basis point is one hundredth of a percentage point.
Also read: In fight against inflation, interest rate is not the only weapon, says RBI governor
Policy impact on bonds
After the announcement of the monetary policy, the yield on the 10-year benchmark 7.26 percent 2032 bond fell to 7.14 percent. It closed at 7.2120 percent on April 6.
In the previous trading session, it closed at 7.2750 percent.
“The rates market was surprised by the status quo in policy rates. Indian government bond yields and OIS rates declined by 7-13 bps and 20 bps, respectively, in response to the announcement. The bond yield curve steepened, while the shape of the OIS curve remained mostly unchanged,” Standard Chartered said in an alert note on April 6.
Traders also took positive note of the downward revision of the Consumer Price Index (CPI) inflation for 2023-24 (Apr-Mar) to 5.2 percent, from 5.3 percent.
Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, said going forward, the market will focus on RBI’s liquidity management and global yield movements. Supply pressure can negate any meaningful downside in yields.
Also read: Bond yield eases sharply after RBI keeps repo rate unchanged
Will the pause reduce borrowing costs?
Dealers are of the view that the rate pause and demand from mutual funds after the recent change in tax laws will help reduce borrowing costs in the coming weeks.
However, some dealers said the pause is only a one-time measure or positive trend for bond yield, but future steps will depend on the emerging inflationary trends.
“The decline in yields may marginally help the government reduce costs since the exact rate will be determined by the demand-supply situation,” Gadia said
He further added that the recent change in tax laws relating to debt mutual funds is likely to have some impact on demand, and therefore, rates will be determined accordingly.
“The cost of borrowing will come down meaningfully only if inflation trends lower on a sustainable basis,” Bagla said.
From the new financial year, income from investments in mutual funds in which not more than 35 percent is invested in equities, will now be considered short-term capital gains (STCG).
