India’s short-end debt outperforms long-end for second straight quarter on dovish RBI

MUMBAI: India’s shorter-duration government bonds outperformed its longer-duration counterpart for a second straight quarter as the country’s central bank continued with liquidity infusion and slashed interest rates in April-June, traders said.

The yield on the benchmark 10-year bond ended at 6.3241%, compared with its previous close of 6.3134%. The 10-year bond yield eased 26 basis points in April-June, after declining 18 bps in January-March.

Meanwhile, the five-year 2029 bond yield ended at 6.0013%, down 45 bps in this quarter after plunging 26 bps in January-March.

“The yield curve steepened due to a comfortable liquidity situation, but with the rate cut cycle likely behind us, the next quarter seems tough,” said VRC Reddy, treasury head at Karur Vysya Bank.

The Reserve Bank of India continued infusing funds into the banking system through debt purchases and bought bonds worth 2.39 trillion rupees ($27.89 billion) in April-May, which was followed by the government buying 495 billion rupees of bonds in June.

Indian bonds post biggest monthly dip since April 2024 on change in RBI policy stance

The RBI also slashed repo rate by 75 bps in the quarter, including a larger-than-expected 50 bps in June.

However, the plunge in the shorter end was partly reversed as the central bank changed monetary policy stance to neutral from accommodative after delivering the June rate cut, and also started operations to suck out liquidity from the banking system.

This led to many analysts believing that rate-cut cycle has ended, even as Governor Sanjay Malhotra said in an interview that inflation below the central bank’s current projections could open up policy space.

Non-confirmist ultra-long end

Even as the majority of bond yields witnessed a downtrend, the yields on the above 30-year bonds rose, after weak demand from insurance companies and continuous heavy supply.

This has led to increased calls for a tweak in supply calendar, with a reduction in ultra-long bonds and increase in up to seven-year papers.

“We expect the demand will come back as the absolute level of yield becomes attractive. Further, remedial measures can be in terms of reduction in supply through reduction in long-term bond auctions,” said Sachin Bajaj, executive vice president and chief investment officer, Axis Max Life Insurance.