Indian bond yields hit over 3-year low amid rate cut expectation

Bonds

Yield on 10-year benchmark bonds hit over three years low on March 26 in anticipation of the rate cut, money market dealers said.

The 10-year benchmark bond 2034 yield was trading at 6.6029 percent at 4:30 PM, which was almost 3 basis points (Bps) lower than previous close of 6.637 percent.

According to the Bloomberg data, yield on 10-year benchmark bond was lowest since January 19, 2022, when it was at 6.60 percent.

Yield on the government securities, especially 10-year benchmark bonds is witnessing a reduction since start of this month. Data indicates that it has eased 14 bps so far in March.

After this fall, the spread between the India 10-year benchmark bond and Reserve Bank of India’s (RBI) repo rate stood at just 35 bps. Usually, the spread between both remain in the range of 60-80 bps.

Money market experts also attributed this fall to the large inflows by the foreign investors into government securities under Fully Accessible Route (FAR) or the securities which are part of global bond indexes.

“The market sentiment saw a significant improvement following the previous 25 bps rate cut by RBI and ongoing liquidity support, which heightens the expectation of further rate cuts,” said Mataprasad Pandey, Vice President, Arete Capital Service.

Experts also added that the bond markets might be closely monitoring the borrowing plan of the government for the next financial year, which may be announced this week.

On February 1, the government in the Union Budget 2025, announced Rs 14.82 lakh crore of gross market borrowing for FY26, as compared to Rs 14.01 lakh crore for FY25. However, net market borrowing to finance the fiscal deficit is lower at Rs 11.54 lakh crore for FY26, from Rs 11.63 lakh crore in FY25.

Hopes for the rate cuts by the RBI has increased in the last few weeks due to better macroeconomic conditions amid lower inflation than the RBI’s medium-term target of 4 percent and a growth bounce back in the third quarter of this fiscal year.

Economists are bracing for another 25 bps rate cut in April policy, whereas some experts believe that there could be an another rate cut in June, which will take the total benchmark rate cuts to 75 basis points so far from February 2025, when RBI’s monetary policy committee first cut the repo rate by 25 bps in last five years.