Bond yields ease after RBI policy announcements. What does it mean for debt investors?

Post policy, Indian bond yields, especially on 10-year G-Sec, eased around 5 basis points (bps).

The Reserve Bank of India (RBI) staying put on policy rates along with Indian bonds being included in FTSE Emerging Markets Government Bond index rallied 10-year government securities (G-Sec) to around 6.75 percent, offering opportunity in debt funds with three-five years’ horizon.

The RBI’s monetary policy committee on October 9 left repo rates unchanged at 6.5 percent but changed stance to “neutral” from “withdrawal of accommodation”.

“The stance change today reflects RBI's confidence on stable inflation going forward. This opens the door for policy easing in the upcoming monetary policy. We expect a rate cut in the December policy with total cuts of 50-75bps in this monetary cycle barring an economic shock,” said Anurag Mittal, Head of Fixed Income, UTI AMC.

Following the announcement policy, Indian bond yields, especially on 10-year G-Sec, eased around 5 basis points (bps).

One basis point is one-hundredth of a percentage point.

At 12.15 pm, the benchmark bond was trading at 6.752 percent against 6.7947 percent at the open and 6.807 percent at the close on the previous trading session.

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“Given that globally central banks are cutting rates with guidance for more cuts and India real policy rates at around 200 bps, RBI MPC decided unanimously to change the monetary policy stance to “neutral”,” said Abhishek Bisen, Head-Fixed Income, Kotak Mahindra Asset Management Company (AMC).

According to experts, a good monsoon season, healthy kharif sowing, and high reservoir levels have considerably improved the inflation outlook.

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For FY26, inflation forecast for the first quarter has been revised to 4.3 percent from 4.4 percent projected in the August policy.

“With global geopolitical disruption, there could be a growth slowdown in the coming months. This should become clear during the next policy statement in December 6. There is a good probability of a rate cut in the next monetary policy,” said Murthy Nagarajan, Head-Fixed Income, Tata Asset Management, for your reference.

Indian GDP is showing signs of slowdown, reflected in discounts offered in four-wheeler sales, slowdown in GST collections.

Ankita Pathak, chief macro and global strategist, Angel One Wealth, said with the change in RBI’s stance, the expectations of rate cut in December and inclusion of Indian bonds in FTSE indices will all help domestic yields to inch lower.

What does it mean for debt fund investors?

Bond yields usually move in anticipation of interest rate changes. Over the past year, 10-year bond yield has been on a downward trend, falling from 7.10 percent levels to around 6.75 percent level this week.

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Bond prices and yields have an inverse relationship. When yields fall, the prices of bonds typically rise. Since debt mutual funds hold a portfolio of bonds, the net asset value (NAV) of the fund usually increases as bond prices go up.

According to experts, the overall situation remains bond-positive, with a clear expectation of rate cuts and a favourable demand-supply situation.

One should note that bond market starts pricing in the rate cut before it happens, we have already seen some of that already with Indian 10-year G-Sec Yield at around 6.75 percent, having already eased significantly in last few months. So, if investors wait for rate cut, it may be too late for them.

Mahendra Kumar Jajoo, Chief Investment Officer–Fixed Income, Mirae Asset Investment Managers (India), said, “Given the kind of corporate credit pickup last year, corporate bond spreads are above long-term average. We believe that funds that invests for three-five years, which includes corporate bond funds, there is a good opportunity for investors. Investors having long-term investment horizon and appropriate risk appetite, gilt funds are also suitable. Investors can also create a basket of both.”

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The recommended strategy is to increase exposure to long-duration bonds to take advantage of the potential capital appreciation as bond prices rise with falling yields. Long-duration funds will benefit the most in a declining rate environment.

“Recently hardened yields provided an opportunity to add duration as already favourable demand-supply dynamics get supplemented by increased expectations on the rate cut cycle,” said Vikas Garg, Head of Fixed Income, Invesco MF.