Bond market sees highest volatility in 3 years on RBI policy surprises

Bond yields swung sharply after RBI's 50 bps rate cut, neutral stance, and CRR changes surprised investors, marking the most volatile day in nearly three years

The bond market exhibited immense volatility on Friday, the highest in almost three years since August 2022, after the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC) meeting outcome announcement, as multiple surprises caught the market off guard, said dealers.

 

The MPC decided to cut the policy repo rate by 50 basis points (bps), as compared to a consensus of 25 bps. The stance of the policy was changed to “Neutral”, yet another surprise, as it was changed from “Neutral” to “Accommodative” in the previous meeting. Furthermore, banks’ CRR (cash reserve ratio) requirement was reduced by 100 bps in a staggered manner.

 

 

The benchmark yield moved by 15 bps during the trade on Friday, which was the highest since August 5, 2022, when the yield had moved by 21 bps within a day.

 

The yield on the benchmark 10-year government bond fell by 12 bps in the initial hour after the 50-bp rate cut, against the expectation of a 25-bp cut. The 10-year bond later reversed some gains after the change of stance to “Neutral”. The benchmark bond gave up all gains by the end of the trade to settle at 6.29 per cent, 4 bps higher, against the previous close of 6.25 per cent.  ALSO READ: 5 key takeaways from RBI MPC June meet: Rate cut, CRR, inflation and more 

“Initially, the unexpected 50-bp rate cut led bonds to rally. But the surprise reversal of the policy stance from ‘Accommodative’ to ‘Neutral’ caught markets off guard, prompting a pullback. With multiple surprises — both positive and negative — markets saw volatility. The CRR cut gave another boost, but as all policy moves were delivered upfront and there were no signals of further action from the RBI, participants began offloading positions,” said Vijay Sharma, senior executive vice-president at PNB Gilts.

 

The short end, particularly up to the five-year segment, performed the best across both SLR (statutory liquidity ratio) and non-SLR (corporate bond) categories, mainly due to lower funding costs. These instruments are typically bought for interest income rather than capital gains. 

 

The yield on three-year and five-year government bonds settled 5 bps lower at 5.66 per cent and 5.83 per cent, respectively.

 

Meanwhile, the longer end — especially bonds with seven- 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. Market participants said that some further steepening is likely.

 

“The rate cut cycle is likely near the end, with most 25 bps of cuts left in the magazine. Further, the broader outlook remains sensitive to currency volatility and the RBI’s operations. Given the higher risk premium, credit spreads, especially for AA-rated and below bonds, may widen slightly compared to last year, as investors demand higher risk premia,” said SBI Capital Markets (SBICAPS) in a note.

 

The bond market, which had been rallying in a one-way trend for the past two-three months, is now expected to consolidate and establish a new trading range between 6.12 per cent and 6.28 per cent, dealers said. Barring any major global triggers, this range could persist over the coming months.

 

Market participants also noted that movements in US Treasury yields are unlikely to have a significant impact unless they breach key levels — above 4.60 per cent or below 4.30 per cent. Within the 4.35 per cent-4.60 per cent range, any effect on the domestic bond market is expected to be limited to minor fluctuations of 1-2 bps.