U.S. bond yield counterparts experience steeper decline over three months, India's 10-year bond yield follows suit
India's bond yields experienced a marginal increase this week, ahead of the Reserve Bank of India's (RBI) policy decision on Wednesday. Despite the decline in bond yields over the previous weeks, India's bond yields remained flat on Monday.
The RBI is expected to keep its policy repo rate unchanged at 5.50%, maintaining a neutral policy stance. The Monetary Policy Committee (MPC) will continue to monitor growth and inflation trends before making any further changes.
Regarding inflation, the RBI foresees core inflation moderately above 4% and expects overall inflation for FY26 to be around 3.1%. On economic growth, the RBI is retaining its GDP growth forecast at 6.5% for FY26.
RBI Governor Sanjay Malhotra emphasized that the decision to hold rates steady is to allow more time for the effects of earlier rate cuts to transmit fully to credit markets and the broader economy. The bank will keep a close watch on incoming data and evolving macroeconomic conditions to adjust the policy path accordingly.
Foreign investors broke a three-month net selling streak in India's bond market in July, with foreign investors pouring into the two extreme ends of India's yield curve. Foreign investors purchased 25 billion rupees of index-linked bonds in India last month.
The rates in India's overnight index swap market showed a strong receiving bias on Monday, with the two-year OIS rate dropping over 6 bps to 5.4050% and the one-year OIS rate dipping nearly 6 basis points to 5.4475%. The liquid five-year OIS rate lost over 7 bps to end at 5.6425%.
The rates tracked a decline in domestic bond yields and U.S. Treasury peers on Monday. Meanwhile, the U.S. 10-year bond slipped to a three-month low due to expectations of Federal Reserve interest rate cuts as soon as September.
The RBI will conduct a 2-day Variable Rate Reverse Repo auction to manage liquidity conditions. The next MPC meeting is scheduled for late September 2025, where further policy updates will be considered based on new data.
In summary, the expectations for the RBI's policy announcement are a status quo on interest rates with a neutral stance, cautious monitoring of inflation and growth dynamics, and a focus on ensuring that the previous cuts translate into broader economic benefits.
- Amidst the upcoming RBI policy decision, traders are positioning themselves in the Defi and crypto markets, anticipating that the policy repo rate will remain at 5.50%.
- As the RBI increases its focus on ensuring growth, some investors are looking to diversify their assets by investing in NFTs and ESG-focused companies.
- The increase in India's bond yields and the resulting marginal dip in bond prices has resulted in some investors considering withdrawing from their individual retirement accounts (IRAs) to take advantage of the situation.
- However, given the ongoing inflation concerns, some traders are holding back on buying bonds, preferring instead to invest in indexes or wait for the Fed to make an interest rate cut announcement.
- The RBI's policy decision will not only impact Indian bond markets but also influence the value of Trader Joe's index funds, as many of these funds have a significant allocation in Indian government bonds.
- The careful monitoring of growth and inflation trends by the Monetary Policy Committee (MPC) could potentially impact the growth trajectory of various businesses relying heavily on financing, such as real estate and infrastructure companies.
- Major foreign investors have and will continue to take interest in India's bond market, especially in index-linked bonds, due to the current favorable rates and opportunities for growth.
- Financial analysts believe that the RBI's decision to keep interest rates steady aims to facilitate the smooth transmission of the previous rate cuts to the broader economy and stimulate further economic growth.
- With the RBI's continued emphasis on inflation management, some investors are considering the potential benefits of investing in assets such as stocks or mutual funds that offer protection against inflation and contribute to "financial fire" for retirement.
