Rate cut hopes fade: G-sec yield sees highest single-day rise in 14 mths

The benchmark government bond yield witnessed its highest single-day surge in 14 months since June 4, 2024, following the outcome of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) meeting on Wednesday.

 

The benchmark yield rose by 8 basis points (bps) to settle at 6.41 per cent — its highest since April 11 this year — against the previous day’s close of 6.33 per cent.

 

Market participants said the market was expecting a dovish policy; however, the tone turned out to be hawkish, with the inflation projection for the first quarter of the next financial year coming in higher than expected, thereby reducing the room for a rate cut.

 

 

“Market was expecting a dovish policy. And the inflation projection for the first quarter (Q1) of 2026-27 (FY27) was higher than expected — that means less room for a rate cut,” said the treasury head at a private bank.

 

The RBI has projected Consumer Price Index inflation at 4.9 per cent for Q1FY27.

 

Some participants said the prospects of further rate cuts were dampened by the RBI’s decision to keep growth projections unchanged, contrary to market expectations of a downward revision. “The RBI governor downplayed the slowdown in growth, which further reduces the likelihood of additional rate cuts,” said a dealer at a private bank.

 

The growth projection for the current financial year (2025-26) was retained at 6.5 per cent. The market was expecting a downward revision of about 30-40 bps.

 

“Everyone was selling, but given the market dynamics, there was some buying by the nationalised banks,” said a dealer at a primary dealership.

 

Meanwhile, the RBI received bids worth ₹67,755 crore at the two-day variable rate reverse repo (VRRR) auction, against the notified amount of ₹1 trillion. The central bank accepted the bidding amount at a cutoff rate of 5.49 per cent. The RBI’s VRRR operations are aimed at absorbing surplus liquidity from the system and anchoring short-term rates closer to the policy repo rate.

 

The weighted average call rate, the operating target of monetary policy, settled at 5.33 per cent on Wednesday, against the previous close of 5.36 per cent.

 

The central bank will conduct another overnight VRRR auction on Thursday, aiming to absorb ₹50,000 crore from the banking system.

 

Net liquidity in the banking system was in a surplus of ₹3.97 trillion on Tuesday, the latest RBI data showed.