Cut-off yield range on benchmark bonds in FY25 at auctions remain lowest in three fiscals

Bonds

The range of cut-off yield set on the 10-year benchmark bond at the weekly bond auctions in the current financial year was the lowest in the last three fiscal years. This was after the completion of borrowing by the government for the current financial year.

According to the Reserve Bank of India’s (RBI) data, the cut-off yield on 10-year benchmark bond was set in the range of 6.7270-7.1889 percent in FY25, the lowest since FY22, when the range was 5.9937-6.78 percent.

According to the Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP, this fiscal has witnessed an unusually tight range in 10-year benchmark bond cut-off yields, driven by sustained foreign portfolio investment (FPI) inflows following India’s inclusion in global bond indices, expectations of monetary easing, fiscal consolidation, a well-balanced supply-demand dynamic and strong institutional participation.

“These factors have led to a sharp compression in yields, with the 10-year bond yield dropping over 100 basis points despite the absence of a rate cut,” Srinivasan added.

In FY22, the repo rate was lower at 4.00 percent and the RBI, after keeping its policy rate lower during the pandemic, was increasing it amid high inflation, hence yields were going up at a moderate rate.

The subsequent two financial years saw a higher yield on government securities due to higher inflation and higher repo rate for a longer period.

In FY25, demand for the benchmark government securities from foreign investors has risen sharply due to the inclusion of Indian bonds in two global bond indices—JP Morgan Government Bond Index-Emerging Markets and Bloomberg Emerging Market (EM) Local Currency Index—leading to an inflow of Rs 1.04 lakh crore since then.

Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a Delhi-based fund house, said in FY25, the RBI initially paused the rate-hike cycle it had been on since early 2023, reinforcing stability in bond markets. Inflation has moderated significantly, with the RBI maintaining its FY25 projection at 4.8 percent, down from 6.7 percent in FY23, aided by proactive supply-side measures.

Further, Tulsyan said that the government’s fiscal consolidation efforts—with a revised fiscal deficit target of 4.8 percent of GDP for FY25 and an intention of bringing it down to 4.4 percent by FY26—further supported market sentiment and helped bond yields remain stable in FY25

Experts added that anticipation of the rate cut by the RBI in February after last year's monetary policy decisions, including the one in December 2024 may have bolstered 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 due to declining inflation and in anticipation of a recovery in growth in coming quarters.

Going ahead, yields on government securities are expected to remain lower due to expectations of a further rate cut to support growth.

“While this trend is likely to persist in the near term, potential risks such as global yield volatility, increased domestic bond supply, rupee depreciation and liquidity tightening could introduce intermittent fluctuations. Nevertheless, with a strong structural bid for Indian bonds and a favourable macroeconomic backdrop, the yield environment is expected to remain stable,” Srinivasan added.