Bond yields rebound from day's low after RBI cut; profit booking weighs

Government bond yields pared early gains on Friday as mutual funds and private banks sold at a profit after the RBI cut the repo rate by 25 bps and announced Rs 1 trillion of OMO purchases this month

Government bond yields reversed some early gains by the end of the trade on Friday as mutual funds and private banks sold bonds at a profit after the initial fall in yields, said dealers.

 

The yield on the benchmark 10-year government bond fell up to 6.45 per cent during the day after the rate setting panel of the central bank cut the policy repo rate by 25 bps to 5.5 per cent.

 

However, it settled at 6.49 per cent, against the previous close of 6.51 per cent.

 

Bond yields also declined following the RBI’s announcement of ₹1 trillion in OMO purchases this month. However, some of the decline was reversed after the RBI Governor clarified that OMOs are meant to support liquidity, not to directly control yields. 

 

“I would further like to reiterate that the primary instrument of monetary policy is the policy repo rate. It is expected that changes in the short term interest rates will transmit to various long-term rates. At the same time, the primary purpose of open market operations is to provide sufficient liquidity and not to directly influence G-sec yields,” said the Governor in his statement.

 

Additionally, a segment of the market sees the 25 basis point cut as the last cut of the cycle prompting profit booking in the government bond market and paying in the overnight indexed swap rates.

 

“The policy was dovish but the indication for the room of further rate cut was mixed from the governor. We saw profit booking from mutual funds and private banks later on,” said a dealer at a primary dealership.

 

“The range will now change from 6.45 per cent- 6.60 per cent to 6.40 per cent- 6.55 per cent now (yield on the benchmark 10-year government bond),” he added.

 

On the transmission of the rate cuts in the bond market, the RBI governor clarified that current bond yields and spreads are broadly similar to earlier levels, and the spreads are not elevated.

 

He added that when the policy repo rate is lower, spreads tend to be higher, and it is unrealistic to expect the same spread on a 10-year bond at 5.50–5.25 per cent as it was at 6.50 per cent.

 

“If you compare your bond yields now with the bond yields earlier and the spreads, they are more or less similar. The spreads are not higher. Please keep into account that when the policy repo rate will be lower, the spread will be higher. You cannot expect that the spread, what it was at 6.50 per cent, is the same spread for a 10-year bond to have the same spread as at 5.50 per cent or 5.25 per cent,” the governor said at the post policy press conference.

 

Meanwhile, the government sold ₹32,000 crore worth of 10-year bonds at the weekly auction. Market participants said that the cut-off yield of 6.49 per cent was along the expected lines.

 

“We expect 10yr G-Sec yield to trade in a range of 6.4-6.6 per cent for the remaining part of FY26. In the near term, markets will be guided by lower inflation, strong growth, OMOs in December and possibility of inclusion in Bloomberg indices, which may provide a tactical opportunity for long bond investing,” said Axis Bank in a note.