RBI's FY27 inflation projection cools bond yields; what's the road ahead?

Despite markets continuing to price in policy rate hikes over the next 6-12 months, the softer-than-expected tone of the policy has supported bond markets, said Deepak Agrawal, Kotak Mahindra AMC.

The Reserve Bank of India (RBI) kept its key interest rates unchanged for the third time in a row in the August policy outcome on Wednesday, as it continues to monitor the impact of higher crude oil prices on India's inflation trajectory. 

 

The central bank monetary policy committee voted unanimously to keep the key repo rate on hold at 5.25 per cent, while retaining the 'neutral' policy stance along expected lines. However, bond and equity markets seemed joyous following the RBI action as the central bank mildly cut its inflation projection and revised the growth outlook upwards.

 

Sanjay Malhotra-led MPC raised GDP growth for FY27 to 6.7 per cent from 6.6 per cent earlier and lowered the CPI inflation for FY27 to 5 per cent from 5.1 per cent. 

 

 

What moved bond yields?

Following this, the yield on the 10-year government bond was trading at 6.8 per cent around 11.25 AM, compared to Tuesday's close of 6.82 per cent. Shortly after RBI rate announcement, the yield dropped 6 basis points to 6.76 per cent. 

 

"Despite markets continuing to price in policy rate hikes over the next 6-12 months, the softer-than-expected tone of the policy has supported bond markets," said Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC.  Also Read | Rupee gains post RBI policy; analysts say may rise to 90/$

 

Echoing similar view, Vikas Garg, head of fixed income at Invesco Mutual Fund, said that the overall policy outcome was marginally more dovish than expected, particularly on the inflation outlook and liquidity management approach. 

 

"The absence of any indication that the RBI intends to use permanent liquidity absorption tools to manage excess liquidity arising from capital inflows is supportive for bond market yields," he added.

 

Bond market outlook: Yields to remain rangebound

Analysts see some downward pressure on yield from hereon, but little scope for a runway rally, with external factors expected to drive the yields.  

Avnish Jain, CIO - fixed income, Canara Robeco Asset Management Company, siad that going forward, markets will likely be driven by geo-political developments. "Markets will further be tracking inflation numbers coming out next week. In the short term, 10-Y G-Sec is expected to move in 6.70-6.85 per cent range," said Jain.  Also Read | RBI policy & market outlook: Calm is conditional, say analysts

 

For bond markets, the real actionable line in the RBI's policy isn't the rate call at all, said Sneha Pandey, fund manager for fixed income at Quantum AMC, but the liquidity commentary. 

 

"A 'two-way' approach to keep WACR anchored around the policy corridor tells us the RBI is now actively managing both surplus and tightness, not just sitting on a growing cushion. That's the detail desks should be pricing, not the unchanged repo number everyone already knew was coming," Pandey said.

 

That argues for caution on aggressive duration calls and a greater tilt toward accrual as the more dependable near-term strategy, Pandey said. 

 

"It's also a reasonable moment for investors to evaluate dynamic bond funds which are ideally a well-blended mix of G-Secs and AAA-rated PSU bonds that actively manage duration through this kind of range-bound market without layering on additional credit risk on top of it," Pandey added.

 

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