Mutual Funds

Bond Yields in India Decline Ahead of RBI Debt Buy

The yields on Indian government bonds fell on Thursday, April 17, as investors awaited the Reserve Bank of India to purchase bonds, and a scheduled auction of the government debt was on the cards. The benchmark 10-year bond yield fell to 6.3889% compared to the previous close of 6.4142%, its lowest in more than three years.

RBI’s Liquidity Measures Influence Market Sentiment

The RBI announced a massive liquidity infusion that increased investor confidence. The central bank intends to buy bonds worth ₹400 billion ($4.67 billion) and allowed a ₹1.5 trillion 43-day repo operation to support its accommodative stance after two back-to-back rate cuts. Governor Sanjay Malhotra said, “We intend to keep an adequate surplus in the banking system of ₹2.2-2.5 trillion to achieve effective monetary policy transmission.”

Analysts believe this is a typical signal of constant interim liquidity support, which is necessary to fuel economic growth. Thus, the reaction in government bond yields is sharply downward, with the 10-year bond yield falling to 3 basis points at 6.41%, while the 3-5-year yield dropped by 5-6 basis points.

Government’s Debt Auction and Borrowing Plans

Bond yields are affected not only by the RBI’s actions but also by the borrowing strategy off the go. India is planning to borrow through bond sales nearly ₹8 trillion ($93.34 billion) from April to September, which will account for 54% of the estimated gross borrowing of this value for the coming year. This borrowing strategy is slightly less than expectations built into the market, which are at 56-59% of the ₹14.82 trillion target for the new fiscal year starting on April 1.

According to sources, the sale will take place later today. They will be selling bonds worth an estimated value of ₹320 billion ($3.7 billion), including the liquid 15-year paper and a new 40-year bond. These two factors and the planned sale soon after have kept the pressure down on bond yields.

Market Outlook and Investor Sentiment

Market players are now pricing an expectation for the central bank to inject around ₹3 trillion in durable liquidity through open market operations (OMOs) and forex swaps, which should strongly support the bond market’s positive outlook. The RBI’s dovish approach in recent months, along with easing inflation in India and encouraging global rate-cut cues, has reignited demand for bonds, especially long-duration bonds.

Investors are now eyeing any developments regarding President Trump’s tariff policies and their consequential impact on emerging markets. However, market sentiment remains subdued, even with some respite coming from a weaker U.S. dollar. Analysts are pegging the rupee to trade in a range of 85.70-86.70 for a holiday-shortened week, the key influence being the movement of the Chinese yuan.

Conclusion

The decline in Indian bond yield ahead of the RBI’s purchase of debt and the government’s auction of debt speaks volumes about the market view of the RBI’s liquidating operations and borrowing programmes. The bond market will have investors following closely any further developments in the RBI’s ongoing accommodative position that can impact the economy globally.