Ahead of the Reserve Bank of India’s monetary policy review on April 9 and US President Donald Trump’s new tariff policy, India’s benchmark 10-year bond yields on Wednesday fell sharply by nine basis points (bps) to 6.49 per cent on a year-on-year after the central bank announced it would buy Rs 80,000 crore worth of bonds in April. When bond yield — the return an investor can expect to earn until maturity — falls, bond prices go up. While a decline in bond yields generally suggests that markets are expecting lower interest rates in the future, it doesn't necessarily guarantee or lead to a fall in interest rates in the near future. Cues from US bond yields Closely following the trajectory of US bond yields, Indian bond yields have fallen 24 bps since March, after the RBI cut the repo rate by 25 bps in the February policy review. For the financial year 2024-25, the 10-year yield has plunged 62 bps so far, its biggest drop in five years. The 10-year US Treasury notes' yield decreased to 4.15 per cent on April 1 and to 4.12 per cent on April 2 morning, marking the lowest level since December 6, 2024. This decline is attributed to investors seeking safer assets ahead of Trump's anticipated tariff announcement on Wednesday. Indian banking sector's improved liquidity The comfortable liquidity situation as seen by a slight deficit last week has ensured that India's bond yields have come down, said an analyst. The cut-offs for all the three Treasury bills have come down to almost the same at 6.30 per cent. The 10-year bond yield is likely to go down further depending on the state of liquidity. “Two things need to be considered here. First there would be three variable rate repo (VRRs) maturing in the next couple of days till April 7 which would be broadly around Rs 1.81 lakh crore. Presently there are large deployments in the SDF which should counter the same,” said Madan Sabnavis, chief economist, Bank of Baroda. Further, the RBI has shown preparedness by announcing four open market operations (OMOs) this month for Rs 20,000 crore each. The VRR auction on Wednesday has less than the notified amount of Rs 25,000 crore. “It looks like this would be managed well by the RBI through the combination of OMOs and VRR auctions,” he said. What to expect from RBI monetary policy review The second factor is that the RBI’s monetary policy is coming up. There is speculation of various options being implemented this time: a cut in Cash Reserve Ratio (CRR), change in stance to accommodative, and a 25-50 bps cut in repo rate. “However, we believe that 25 bps would be more likely with stance probably also being changed,” Sabnavis said. Banks are yet to change their deposit rates given the resources issue towards the end of March. Any change will be gradual. This is also the time when there will be less ebullient demand for credit and hence there will be time to align rates on both sides by banks. During the quarter so far, the RBI has injected around Rs 5.5 lakh crore of durable liquidity into the banking system through a combination of OMO purchases, longer-duration VRR auctions and forex swaps. The liquidity condition is expected to be positive going forward, Tata Mutual Fund said in a report. The CPI-based inflation for the month of February remained at the levels of 3.61 per cent, putting the RBI in a comfort zone on its repo rate cut plan. Corresponding inflation rate for rural and urban is 4.64 per cent and 3.87 per cent, respectively. The rate of inflation based on WPI Food Index decreased from 5.97 per cent in January 2025 to 3.75 per cent in February 2025.
