Govt bond yields seen hardening after RBI governor ruled out a rate cut

Yield on benchmark 10-year government bond settled at 6.81 per cent on Friday

Government bond yields are expected to rise on Monday as the market sentiment dampened after Reserve Bank of India (RBI) Governor Shaktikanta Das cautioned that an interest rate cut at this stage could be “very premature” and “risky", citing significant inflation risks.

The RBI has projected inflation at 4.5 per cent for the current financial year (FY25), based on the assumption of a normal monsoon and stable supply conditions. However, retail inflation surged to a nine-month high of 5.49 per cent in September, driven by rising food prices and unfavourable base.

 “The yield (on the benchmark 10-year government bond) will trade between 6.80 per cent and 6.85 per cent,” said a dealer at a state-owned bank.

“We have around one and half months till the next meeting (monetary policy meeting), and the upcoming data will decide the course of the market. We are also eyeing the movement in US yields,” he added.

The yield on the benchmark 10-year government bond settled at 6.81 per cent on Friday. 

 “Considering the RBI governor’s statement that a rate cut would be premature at this stage, given high inflation print in September and expectations of continued elevated inflation in October, a rate cut in the December monetary policy meeting appears unlikely. While a rate cut may be possible in the February meeting, it will depend on incoming data,” said Madan Sabnavis, chief economist at Bank of Baroda. 

Earlier, a segment of the bond market was expecting the domestic rate-setting panel to start cutting the repo rate in December.

In the monetary policy review earlier this month, the six-member Monetary Policy Committee (MPC) changed the stance to neutral from the withdrawal of accommodation while keeping the policy rate unchanged.

On the global front, after a slew of unfavourable data, the market now sees a 25 basis points rate cut by the US Federal Reserve against the earlier expectation of 50 basis points. 

“After the release of the inflation data for September, we are now expecting a 25 basis points rate cut in February,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

Meanwhile, overnight indexed swap (OIS) rates curve is currently reflecting a total of 50 basis points rate cut in the next six months by the domestic rate-setting panel. 

OIS rates are a crucial indicator reflecting expectations for interest rate changes, and it is the principal tool for hedging interest rate risk in India.