Bond yields drop to 3-yr low following RBI's dovish monetary policy stance

Government bond yields fell to a more than three-year low on Wednesday, reaching their lowest since December 20, 2021, as traders bought domestic securities following the Reserve Bank of India's (RBI’s) dovish monetary policy stance, dealers said.

 

The benchmark yield settled at 6.44 per cent, down from the previous close of 6.48 per cent. Bond yields and prices are inversely related.

 

RBI Governor Sanjay Malhotra mentioned in the post-policy conference that the central bank would ensure surplus liquidity and that an accommodative stance implies either a status quo or a rate cut, prompting traders to anticipate a deeper rate cut by the Monetary Policy Committee (MPC), the rate-setting panel.

 

“He said things about fear of slowdown and growth. He also clarified that stance change is more to do with repo than liquidity. All of that led to this reaction and not a surprise that way. But now we are expecting a deeper rate cut after this. He also said clearly that now it's a pause or cutting, that's the way stance change means now,” said Anshul Chandak, head of treasury at RBL Bank. “In the next four-five months, I see the yield (on benchmark bond) trading toward 6.25 per cent,” Chandak added.

 

The yield had risen to 6.51 per cent ahead of the policy and remained stable after the 25 basis points (bps) rate cut and the shift to an accommodative stance, as both decisions were already priced in by the market.

 

“Let me also clarify that the stance should not be directly associated with liquidity conditions,” Malhotra said.

 

“While liquidity management is important for monetary policy, including decisions related to policy rate, it is an operating tool with the RBI for various purposes such as monetary policy transmission. Monetary policy decisions to change policy rates do, however, have implications for liquidity management, being the operational tool to carry out the policy changes. To summarise, our stance provides policy rate guidance, without any direct guidance on liquidity management,” he added.

 

On the other hand, the rupee extended its weakening streak for the third consecutive trading session to fall by 0.4 per cent against the dollar to settle at 86.70 per dollar on Wednesday, against the previous close of 86.26 per dollar. The rupee depreciated tracking Chinese yuan, which hit record low after fresh US tariffs on Chinese goods.

 

Market participants said that the trajectory of the local currency remains uncertain, given the current global scenario.

 

“The rupee weighed down by external headwinds, including a record-low Chinese yuan that has intensified depreciation pressures across Asian currencies. Meanwhile, fresh US tariffs on Chinese goods have heightened risk aversion, dampening demand for emerging market assets and raising concerns about spill-overs on India’s trade. Despite the dollar softening against haven currencies like the yen and Swiss franc, its strength persists against Asian peers due to yuan volatility and geopolitical uncertainties. Sustained yuan weakness and global risk-off sentiment may keep the currency range-bound with a downside bias,” said Abhishek Goenka, founder and chief executive officer (CEO) of IFA Global.