The Reserve Bank of India (RBI) expects to increase its repo rate by 25 basis points in October, and with ongoing inflation risks, it is anticipated that this rate will reach 5.75 to 6 percent in fiscal year 2027. This will lead to pressure on government bond yields.
Pressure on Government Bonds
According to a report from a reputable bank, Indian government bonds came under pressure in September, as high crude oil prices and rising global yields bolstered expectations for an increase in RBI rates. Additionally, the increase in the supply of domestic bonds, including open market operations (OMO) sales and further issuance of long-term bonds in the second half borrowing calendar, added to this pressure.
Read more: Oman Introduces Investment Opportunities at the Milan Pharmaceutical Exhibition
Impact on Bond Yields
The pressure on the 5-year segment was particularly noticeable. During September, the yield on 5-year bonds increased by 45 basis points, while the figure for 10-year bonds was 24 basis points. This resulted in a reduction of the gap between the 10-year and 5-year yields from 36 to 16 basis points.
The Government of India plans to issue 7.86 lakh crore rupees of government bonds in the second half of fiscal year 2027, while the gap between planned and expected borrowing is about 1.1 lakh crore rupees.
However, net borrowing has not changed significantly overall as redemptions have decreased with aggressive swap auctions, and repayment and financing needs in fiscal year 2027 have declined.
It is expected that an increase in T-bill issuance and an increase in average state borrowing will also add to market supply. The central bank continues to absorb the surplus from FCNR(B) deposits through variable rate reverse repo auctions (VRRR), open market operations (OMO) sales, and foreign exchange swaps.
Ultimately, the repo rate is expected to reach 5.75 to 6.00 percent, while warnings regarding continued monitoring of inflation are issued. If restrictive policies coincide with high crude oil prices, rising global yields, and weak auction demand, there may be further pressure on the yield of 10-year bonds.
Read more: Oman: Investors Focus on Bank and Industry Stocks in Muscat Stock Exchange · Increase in Service Inflation in Japan and Likelihood of Further Rate Hikes by the Central Bank
