RBI's cash infusion to aid more rally in short bonds, says Nomura

The strategist expects the RBI to buy bonds worth Rs 3 trillion in the current financial year, with a bias towards more action

Indian government bond prices are set to rise further, with the five-year yield expected to drop to three-and-a-half year low by June, supported by the central bank's ongoing liquidity injections, a Nomura strategist said. 

"We are positive on Indian bonds, but we are much more positive on the shorter end of the curve than the back-end," EM Asia rates strategist Nathan Sribalasundaram said. 

The Reserve Bank of India has reduced repo rate by 50 basis points in 2025 and changed its policy stance to accommodative earlier this month. 

The central bank has also bought bonds worth Rs 3.45 trillion ($40.31 billion) since the start of 2025, including 1 trillion rupees in April. 

The strategist expects the central bank to buy bonds worth Rs 3 trillion in the current financial year, with a bias towards more action. 

The nation's five-year bond yield was around 6.15 per cent on Friday, after having dropped by nearly 50 bps since the start of March. The benchmark 10-year bond yield was around 6.37 per cent. 

"We think there is more scope for a rally and the five-year and 10-year bond yield spread could steepen up to 50 basis points in next couple of months." 

Sribalasundaram anticipates the five-year bond yield to drop to 5.75 per cent by June, levels last seen in December 2021, while seeing a limited downside in 10-year bond yield to 6.25 per cent. 

"The markets are under-pricing the monetary policy expectations. RBI will want to err on the side of caution in the current environment and more liquidity is better than having less liquidity," Sribalasundaram said. 

He also expects foreign inflows to remain a key driver this financial year, projecting $10 billion to $15 billion in flows, after similar levels last year, even as India's weightage in JPMorgan's emerging market debt index hit 10 per cent last month. 

There are still some funds that are not at the 10 per cent weightage, so there is room to build India positions, Sribalasundaram said. 

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