The government bond yields rose following sell-off by traders post monetary policy announcement on Wednesday that kept policy rate unchanged. The yield on 10-year benchmark bond rose 8 basis points to close the day at 6.41%, highest since April 11. This has been the biggest single day rise since June 2024. The yield closed at 6.33% on Tuesday.
The Reserve Bank of India kept the policy rate unchanged and maintained the neutral stance in its August policy. Though the decision was line in the market expectation, few participants expected a surprise rate cut.
The yield on 5-year bond was up 6 bps to 6.10% on Wednesday, while yield on 2-year bond rose 7 bps to 5.77%.
“There were a few market participants who had positioned for a rate cut. So those positions got trimmed out,” said a dealer at a private sector bank.
Another dealer from a bank said “The bar for a rate cut is quite high now, which led to some profit booking and sell-off. Besides, market was positioned for a dovish policy.”
Inflation Outlook Creates Uncertainty
RBI lowered the inflation guidance for the current financial year to 3.1% from 3.7% earlier. However, RBI said that inflation in Q4FY26 is likely to edge up above 4% owing to unfavourable base effect and demand side factors. It estimated the inflation for Q1FY27 at 4.9%.
“There were expectations (around 30% market participants) from the people that there may be a rate cut. As it did not materialise, the rates moved up. The language of the policy was also not dovish. Although they have lowered the yearly projection of inflation, the projection for the fourth quarter remained unchanged, which impacted sentiment in the market,” said Gopal Tripathi, treasury head, Jana Small Finance Bank.
Future Rate Cuts Depend on Data
Though high bars are set for a rate cut, most market participants do not completely rule out another for the current financial year as they await for the incoming data to assess the further possibility of it.
“With inflation likely to trend higher post the near term favourable trends, the bar for rate cuts ahead is set very high. We can see some room for the last leg of easing only if growth momentum slows significantly,” said Upasna Bhardwaj, chief economist – Kotak Mahindra Bank, said in a note.
“Going ahead, the sell mode will likely till another 5-7 bps, and then it will sort of stabilise and continue to react to data,” said a market participant.