For the last couple of years, even as India’s equity indices have held up, the bond market has been sending a very different signal – that of rising risk and growing concerns. However, until 6 months ago, India’s benchmark bond yield – the 10 year Government bond yield – seemed to be reasonably insulated from these concerns. Now that final frontier too has cracked leaving the stockmarket as the only party which is still rocking in Mumbai:
“India’s inflation is at an eight-year low, and the Reserve Bank of India (RBI) has been on a rate-cutting spree since February. However, counter-intuitively, India’s 10-year benchmark government bond yields surged, defying the normal pattern.
Bond yields have grown over 20 basis points since the RBI’s last rate cut in June. On Wednesday, the 10-year bond yield closed at 6.47 percent.
While bond yields tend to fall when interest rates are slashed, market experts say yields have been climbing due to mounting concerns over lower-than-expected tax collections, worries that the government may be unable to meet its fiscal deficit target, and the potential impact of the United States’ tariffs on Indian exports….
Author and columnist Tamal Bandyopadhyay told ThePrint, “The bond market sees the future. The perception is that now inflation has bottomed out, from here it can only go up. The market is also pricing in no further rate cut.”
A neutral stance indicates that RBI will neither opt for increasing money supply in the economy, nor reducing it—implying a rate pause.
“In June, when the RBI cut the rate by 50 basis points, it was a dovish approach, but the stance was moved from accommodative to neutral. Everything is based on perception. What the market read was that the RBI is done with rate cuts. This is the pivot, the end of it,” Ashutosh Khajuria, former executive director of Federal Bank, told ThePrint. “The continuous fall in yields stemmed, and all the negative news going on about Indian exports likely to be hit because of US President Donald Trump’s policies caused turbulence in the market.””
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