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Informist, Wednesday, Oct. 1, 2025

 

By Aaryan Khanna

 

MUMBAI – The Reserve Bank of India's commentary at the monetary policy announcement Wednesday was exactly what the bond market had been looking for for four months, and was received warmly. By just acknowleding there is space for additional monetary easing, the RBI is likely to have ensured gilt yields will drift lower in the next two months. Still, bond traders remain sceptical that the rate cut is as much of a slam dunk as some analysts feel. 

 

On Wednesday, the Monetary Policy Committee unanimously held the policy repo rate at 5.50% for the second straight meeting and kept the monetary policy stance at 'neutral'. Howevever, two external members said they favoured changing the stance to 'accommodative', presumably as a guide to further rate cuts. Combined with the MPC resolution that acknowledged more policy space to support growth, traders felt the members were in lockstep with their reading of recent and future macroeconomic indicators.

 

At the last meeting, RBI Governor Sanjay Malhotra had spooked the bond market by highlighting relatively high inflation and firm growth in Apr-Jun 2026 as a deterrent to further policy easing. This time, both Governor Malhotra and Deputy Governor Poonam Gupta stressed that the central bank had to cut its GDP growth forecasts for Oct-Dec and beyond due to the impact of the 50% US tariff on Indian goods, which had not been announced at the time of the August MPC meeting. This about-turn was welcomed by traders.

 

"The RBI MPC policy today seems to suggest a wait-and-watch approach to the evolving macro environment and future economic data," said Sameer Karyatt, executive director and head of trading at DBS Bank India. "The policy suggested that there was enough space available for policy action if required to support economic growth. The market yield might react to the dovish policy over the next few days, with future rate cuts getting priced into the curve."

 

OUT OF RUNWAY?

Some caution comes due to the bevy of data points between now and the next MPC decision on Dec 5. For one, slowing GDP growth is seen as a key determinant to whether the MPC will pull the trigger or not, and the September quarter reading is due a week before the monetary policy review. Changes related to the Goods and Services Tax will pull down inflation immediately, but the impact seems factored into the RBI's new projections. In fact, weather-related disruptions may threaten the benign run of food inflation, especially at a time when the projections assume the purple patch will continue – headline CPI inflation is seen at 1.8% in Oct-Dec. 

 

In fact, some dealers were more worried about CPI inflation in 2026-27 (Apr-Mar) than in FY26, the outlook for which was cut by 50 bps to 2.6% Wednesday. The forward-looking MPC may avoid cutting rates with inflation having bottomed out, according to the projections, then rising to 4.0% in Jan-Mar and then averaging 4.5% in FY27, according to the RBI's Monetary Policy Report. Even at the current repo rate of 5.50%, the real policy rate on a one-year ahead basis is only 1.0%, suggesting accommodation, dealers said. 

 

These factors have led to a situation where there is no hurry to position for a rate cut by stocking up on bonds and only a handful of trading houses seem to have a strategic call on the 10-year yield moving down materially from current levels by March. Some banks are optimistic on the five-year bond outperforming its peers as the market's hopes crescendo towards further policy easing, even if it doesn't come.

 

In fact, the positive market reaction Wednesday was largely led by the RBI governor's nudge rather than anything spectacular in the policy. Malhotra said at the post-policy press conference that the 10-year gilt yield should fall further from the then-prevailing levels of around 6.60% and that the RBI had considered steps to bring down bond yields. Such was the impact of his remarks that the benchmark yield ended at 6.52% on Wednesday, with the bond having its best day in over a month. There was some speculation that the comment could be hinting at open market bond purchases, though this was rubbished by most traders as durable liquidity remains in a surplus of nearly INR 5 trillion and scheduled infusions will add to that pile until the end of November. 

 

"The policy tone itself seemed to be neutral and the market has taken comfort from the governor's statement that bond yields could be lower," said Sudarshan Nambiar, head of trading at YES Bank. "The MPC seems to be aligning to the market's reading on data dependence. The inflation forward projections make it difficult to expect a rate cut going ahead."

 

SUPPLY-DEMAND PANGS

Long-term investors too such as life insurers don't seem in a hurry to lock in yields, though bonds maturing in 30-50 years also felt the positive impact of the governor's remarks. Borrowing by states, which has unexpectedly coalesced into long-term bonds, has also risen and sponged away demand that may have otherwise been allocated to the Centre's offering. State bond issuance in Apr-Sept was 30% higher on year at 5.0 trillion and the market expects demand-supply dynamics across these offerings to play a key role in anchoring benchmark gilt yields.

 

Add to that the higher share of supply in the 10-year gilt in the borrowing calendar for the second half of the fiscal, and the optimism around the benchmark yield starts to fade. In Oct-Mar, 28.4% of gilt issuances will be through the sale of 10-year paper, higher than the 26.2% share in Apr-Sept. Consequently, traders see the 10-year gilt yield in a 6.40-6.65?nd until the December policy.

 

"The dovish comments without a rate cut give the market hope and something to play for in the next two months," said Poonam Tandon, chief investment officer at IndiaFirst Life Insurance, said. "Still, supply will constrain the move downward in yields and I can't say there is any urgency to lock into current yields, but that will be dependent on the inflows for each market participant. However, upward movement in yields is limited."

 

All in all, the bond market considered the October policy pragmatic and balanced, even as some burnt their fingers on their bets of a rate cut Wednesday. Going ahead, traders just don't feel the rate cut is enough of a certainty yet and also fear the RBI's more positive communication may lull them into a false sense of security on reading the warning lights on the macroeconomic data.  End

 

Edited by Avishek Dutta

 

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