 "treasury bills, Bonds, yield curve, banking system")
Government bond yields softened on Tuesday following dovish remarks by Reserve Bank of India (RBI) Governor Sanjay Malhotra in an interview to Business Standard published on Tuesday, which reduced unease over the future interest rate trajectory, said dealers.
The yield on the benchmark 10-year government bond opened at 6.3 per cent against the previous close of 6.33 per cent. However, the yield inched up during the day because state-owned banks sold bonds at a profit, coupled with muted activity by private banks, said dealers. The benchmark yield settled at 6.32 per cent.
In the interview, Malhotra said that if the inflation outlook turns out to be below projections, it will open up policy space, and the RBI will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance. Malhotra also said that the shift in stance should not be interpreted as an immediate reversal in the policy cycle.
“The RBI governor has on Tuesday taken pains to assuage the frayed nerves of the debt markets by clarifying that the change in stance is a dynamic and evolving process, more attuned to the midpoint of the immediate present and imminent future in a world besieged with VUCA (volatility, uncertainty, complexity, ambiguity)/BANI (brittle, anxious, nonlinear, incomprehensible), which should have a sobering effect on longer-tenor yields that had vaulted into an autopilot mode, as the broader markets (sans a minority) had not been bracing for the steep cut from the RBI,” said Soumya Kanti Ghosh, group chief economic advisor, State Bank of India.
During the June policy review, the RBI had said that monetary policy has limited space to support growth after a 100 basis point (bp) interest rate cut in quick succession since February 2025.
The RBI’s Monetary Policy Committee had cut the policy repo rate by 50 bps during the June review — higher than market expectations — in the policy review meeting earlier this month. The domestic rate-setting panel had changed the stance to ‘neutral’ from ‘accommodative’, which had led to a surge in bond yields.
“The strong opening was weighed down by profit booking by public sector banks and very little activity by private banks because clarity is still lacking. There were reports of variable rate reverse repo auctions, and then this comment by the governor has led the market to guess what amount of liquidity they are comfortable with,” said a dealer at a private bank.
The rise in crude oil prices also weighed on the bond market, said dealers.
Brent crude oil prices rose by 1.5 per cent to $74.27 per barrel. Market participants said that if the oil price breaches $75 per barrel, it will push bond yields further.
“In the current episode of higher oil prices, we expect the excise duty buffer to be the first line of defence before the government considers passing higher global crude oil prices into retail prices. Accordingly, we expect the Consumer Price Index to remain insulated from the global crude oil price move amid rising tensions in the Middle East,” Barclays said in a note on the impact on India due to the rise in oil prices.
On the other hand, the rupee depreciated against the dollar to settle at its lowest level in over two months, weighed down by escalating geopolitical tensions in West Asia and renewed trade concerns after US President Donald Trump signalled the imminent imposition of tariffs on pharmaceutical imports.
The rupee settled at 86.25 per dollar, the lowest since April 9.
“This depreciation was primarily driven by geopolitical uncertainties, prevailing risk-off sentiments, and rising crude oil prices, which collectively pressured the local currency. Moreover, robust dollar demand from oil importers and a short-covering rally observed after a technical breakout contributed to the rupee’s decline,” said Dilip Parmar, senior research analyst, HDFC Securities.
The local currency had appreciated by up to 17 paise to 85.9 per dollar in early trade on the back of inflows, said market participants.
“There was an inflow of $500 million on account of Biocon, which took the Indian rupee below 86, but it then fell again, and any close below 86.2 will take the rupee lower to the 86.7/8 level,” said Anil Kumar Bhansali, head of treasury and executive director at Finrex Treasury Advisors LLP.
