Bonds rallied on Thursday and the yield on the old benchmark bond \u2014 the 7.17% yielding notes maturing in 2028 \u2014 fell as much as 9 basis points during the day, with the RBI reducing the repo rate by 25 bps, changing its stance from \u2018calibrated tightening\u2019 to \u2018neutral\u2019 and lowering its inflation forecast. The yield on the old benchmark bond closed the session 7 basis points down at 7.50%, thereby hitting a one-week low. The yield on the new benchmark bond \u2014 7.26% yielding notes maturing in 2029 \u2014 closed 4 bps down at 7.32%. Reacting to the RBI decision, the rupee appreciated by 11 paise to close at 71.45 against the US dollar. The RBI revised the consumer price index (CPI) inflation downwards to 2.8% in Q4FY19, 3.2-3.4% in H1FY20 and 3.9% in Q3FY20, with risks broadly balanced around the central trajectory. Also read|\u00a0RBI Monetary Policy: RBI cuts repo rate by 25 bps, changes policy stance to neutral The central bank said headline inflation is projected to remain soft in near term reflecting the current low level of inflation and the benign food inflation outlook. \u201cSeveral proposals in the Union Budget for 2019-20 are likely to boost aggregate demand by raising disposable incomes, but the full effect of some of the measures is likely to materialise over a period of time,\u201d it said. Manish Wadhawan, MD and head of fixed income, HSBC Global Markets, said it is definitely a dovish policy, as along with the stance change, the RBI delivered a surprise rate cut. \u201cThe long-end rates will be impacted by large supply of central and state government bond supply lined up for next year. Though the RBI has committed to maintain adequate liquidity in the system, they refused to commit any OMO purchases next year. This means OMOs beyond February remain uncertain. If you look at next fiscal, it does not seem like the RBI may conduct the same quantum of OMOs as much as they did in FY19,\u201d he said. Bond market experts also indicated that the market is still not convinced on the fiscal deficit front and is likely to remain in a wait-and-watch mode before entering into any significant buying. R Sivakumar, head \u2013 fixed income at Axis Mutual Fund, said the policy is quite a bit more dovish than what the markets were expecting. \u201cThe RBI has reduced the rates, changed their stance and also marked down the inflation forecast. However, the market is still very cautious, especially on the fiscal deficit side. Today, bond market has not rallied as much as it used to earlier. The market is essentially saying that even though the rate has been reduced, the cycle may remain shallow and worries over the fiscal deficit are going to remain for the next several months.\u201d The fear of over-supply of bonds is also weighing on the markets, according to dealers. During the Interim Budget, the government announced that gross borrowing for FY20 will stand at Rs 7.1 lakh crore. Market participants pointed out that combined with state bonds, the total market borrowing would amount to Rs 12.5 lakh crore. Vijay Sharma, senior executive vice-president at PNB Gilts, said the market still does not have a concrete answer to the question of who will take care of the excess supply of bonds in the next fiscal year. \u201cThis question is the reason why the bonds did not rally as much as they should have on such a dovish policy. For a sustained bull run, it has to be supported by RBI OMOs in the next fiscal year. The feel good factor is definitely there, but it won\u2019t be supported by a deep rally in bonds commensurate with such a dovish policy,\u201d he said. Speaking on liquidity, RBI governor Shaktikanta Das indicated that the central bank is constantly monitoring the liquidity situation and based on the requirement, it will ensure that there is no liquidity scarcity. RBI deputy governor Viral Acharya also said the liquidity position in the system is in surplus in February. \u201cThe RBI has been injecting system-wide liquidity through open market operations. It has already given the calendar for three weeks in February for Rs 37,500 crore of durable liquidity to be injected. In February, the system liquidity position is in surplus. So, my sense is that there is liquidity for those who are able to get it from lenders,\u201d he said.