Bond yields harden as traders sell bonds at profit after RBI rate cut

Government bond yields rose as traders booked profits following RBI's 50 basis point repo rate cut and change in policy stance, impacting market sentiment

Following last week’s cut in the repo rate, yields on government bonds rose on Monday as traders continued to sell the instrument at a profit, according to dealers.

 

The yield on the benchmark 10-year government bond went up 6 basis points (bps) to settle at 6.35 per cent, against the previous close of 6.29 per cent. 

 

The benchmark yield had risen 4 bps on Friday.

 

While short-term bond yields softened on Friday, they hardened on Monday on the back of profit-booking, said dealers.

 

The yield on the three-year government bond rose 5 bps on Monday to close the day at 5.70 per cent while the five-year bond yield went up 8 bps to close at 5.95 per cent.

 

 

The yield on both the five-year and three-year bonds had fallen 5 bps on Friday. 

 

The Reserve Bank of India said the monetary policy had limited space to support growth further, after reducing the policy repo rate by 100 bps in quick succession since February.

 

The stance of the policy was changed to “neutral” from “accommodative”, which weighed on bond market sentiment.

 

“Private and foreign banks are taking positions. After the 50 basis point rate cut, some amount of buying happened but gains were capped due to profit booking,” said a dealer at a primary dealership.

 

“The data showed private and foreign banks were net sellers, and today (Monday) also they were seen booking profit. Selling will continue for some time,” he added.

 

Market participants expect positions will be reshuffled in the next few sessions because there was less hope for rate cuts in future before the benchmark bond finds a new trading range. They also note that movements in United States Treasury yields will remain a key focus.

 

“The change in stance was negative for the market, so we are seeing some reshuffling. It will continue for some days,” said a dealer at a state-owned bank.

 

“The rally we were seeing before the rate cut is followed by profit-booking. We will find a range after some days. We will see how the US Treasury moves,” he added.

 

Market participants further said the cut in the cash reserve ratio (CRR) reduced the need for additional open market operations (OMOs) for the rest of this financial year.

 

“The OMO was one of the reasons for the rally, now with the CRR cut, we won’t need OMOs for durable liquidity, and with that aspect gone, the market is taking the news negatively,” said a market participant.

 

In the second half of 2025-26, boosted by the CRR cut, the market estimates liquidity surplus to peak at ₹5.5 trillion-6 trillion (about 2.4 per cent of net demand and time liabilities) by November, before gradually declining to ₹ 3.2 trillion (about 1.2 per cent of net demand and time liabilities) by March 2026.