RBI's rate cut bonanza, ₹26,000 crore G-Sec buyback likely to lower bond yields
Bond yields in India are expected to go down following the recent frontloaded rate cut by the Reserve Bank of India (RBI), says economists ANI spoke with.
The economists noted that a rate cut is likely to influence the market to adjust to a revised and more accommodative interest rate outlook, pushing dated government securities (G-sec) yields down further.
Debopam Chaudhuri, Chief Economist at Piramal Group told ANI "The frontloaded rate cut is likely to drive a further easing in dated G-sec yields as markets adjust to a revised interest rate trajectory. The RBI's shift to a neutral stance could be initially interpreted as a signal of a pause in the rate-cut cycle".
He further stated that "these are likely to be short-term adjustments, and bond yields are expected to resume their downward trend once market volatility subsides".
However, in the near term, some upward pressure on yields may emerge as investors may look to book profits after the rally in bond prices. Moreover, the RBI's shift to a neutral policy stance may be initially read by markets as a pause in the rate-cut cycle, which could also cause some temporary volatility in yields.
Additionally, the US Federal Reserve is also anticipated to lower its terminal interest rate to around 4 per cent, creating more room for the RBI to continue with its rate-cutting approach.
Dipanwita Mazumdar, Economist specialist at Bank of Baroda told ANI "India's long end yields especially the 10Y part of the curve has priced in the rate cut. Thus we expect it to be largely capped as the change in stance has hinted lesser scope for future monetary policy easing. Hence we do not expect much momentum. However, the short run part of the curve will be more susceptible to the liquidity support given by RBI especially through CRR cut. Thus we expect some prevalence of a steeper yield curve for India in the near term".
In a parallel move aimed at managing its debt portfolio and supporting the bond market, the Government of India has announced a buyback of dated securities worth ₹ 26,000 crore (face value).
The buyback will be conducted through an auction on June 12, 2025. It will include five securities maturing in 2026: 5.63 per cent GS 2026 (maturing on April 12), 8.33 per cent GS 2026 (July 9), 6.97 per cent GS 2026 (September 6), 5.74 per cent GS 2026 (November 15), and 8.15 per cent GS 2026 (November 24).
There is no notified amount for individual securities within the ₹ 26,000 crore ceiling. The auction will be held on RBI's E-Kuber system between 10:30 a.m. and 11:30 a.m., and the results will be declared the same day. Settlement will take place on June 13, 2025.
With the rate cut and the government's buyback initiative, economists believe bond yields will continue their downward trend in the medium term, providing further support to market liquidity and helping lower borrowing costs for the government.
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