G-sec yield seen range-bound for coming months due to lack of cues

Following RBI's guidance and a CRR cut, dealers expect government bond yields to settle into a range between 6.12 and 6.28 per cent over the next few months

Following the Reserve Bank of India’s forward guidance on liquidity and the interest rate trajectory, market participants expect a lack of significant trading cues in the bond market, which could lead the benchmark yield to remain range-bound, dealers said.

 

“Without any fresh cues, the market—which had been rallying almost unidirectionally over the last 2–3 months—is now likely to settle into a range. I believe over the next 2–3 days, a new range will be established as the market rebalances. Most likely, this range will be between 6.12 per cent on the lower side and 6.28 per cent on the higher side, and it could hold for the next few months," said Vijay Sharma, senior executive vice-president at PNB Gilts.

 

The yield on the 10-year benchmark bond settled at 6.29 per cent on Friday, 4 basis points higher, against the previous close of 6.25 per cent.

 

Market participants further said that the Cash Reserve Ratio (CRR) cut substantially reduces the need for additional OMO purchases for the rest of the current financial year. This shift was also evident in the market’s response, with the G-sec yield curve steepening.

 

The yield on 3-year and 5-year government bonds settled 5 basis points lower at 5.66 per cent, and 5.83 per cent, respectively. Meanwhile, the longer end—especially bonds with 7- and 10-year maturities—saw some selling pressure. This led to a steepening of the yield curve, which had previously been inverted at the shorter end.

 

A durable liquidity infusion was seen in H2FY26, given the seasonal rise in currency leakage—estimated at around ₹2.3 trillion – ₹2.4 trillion—largely driven by festival-related cash demand. Notably, currency leakage had already picked up in Q4FY25 and continued into the first two months of FY26, likely due to improving rural demand. Without RBI intervention, system liquidity surplus could have fallen below 1 per cent of NDTL by March 2026, said experts. 

 

To address this, the RBI chose to cut the CRR from 4 per cent to 3 per cent—to inject durable liquidity. Following this 1 per cent CRR cut, system liquidity surplus is projected to reach 1.2 per cent of NDTL by March 2026. In earlier statements, the governor had indicated that a 1 per cent surplus is sufficient for monetary transmission.

 

This is a notable shift, as CRR has not been below 4 per cent since the Covid-19 period. The RBI Governor suggested that experience shows a 4 per cent CRR may not be necessary during non-crisis times. Importantly, a CRR cut helps reduce banks' cost of funds, enhancing policy transmission.

 

“The CRR cut significantly reduces the need for OMO purchases for the remainder of FY26. This is also reflected in the market reaction with the G-sec yield curve steepening,” said IDFC First bank in a note.

 

Experts said that liquidity conditions will likely evolve unevenly. From ₹1.7 trillion in May 2025 (about 0.7 per cent of NDTL), surplus liquidity is expected to rise to over ₹5 trillion (about 2.1 per cent of NDTL) by August 2025. This jump will be supported by increased government spending post-RBI dividend transfers, with the Centre’s cash surplus at ₹3.6 trillion as of May 2025. Additional support will come from G-sec buybacks, aimed at managing FY27 redemptions and deploying excess cash.

 

In H2FY26, boosted by the CRR cut, liquidity surplus is expected to peak at ₹5.5 trillion–₹6 trillion (about 2.4 per cent of NDTL) by November 2025, before gradually declining to ₹3.2 trillion (about 1.2 per cent of NDTL) by March 2026.