Context:
Following the Reserve Bank of India’s recent monetary policy announcement, government bond yields declined sharply, hitting their lowest levels since December 2021. Market participants interpreted the accommodative stance and RBI Governor’s remarks as strong signals for future rate cuts, boosting demand for bonds.
Key Developments:
Benchmark Bond Yield Movement
- 10-Year Government Bond Yield:
- Settled at 6.44% on Wednesday
- Down from 6.48% in the previous session
- Lowest yield level since December 20, 2021
- Pre-policy Yield Level: Rose to 6.51% ahead of the announcement
- Market Interpretation: Both the 25 bps rate cut and stance shift were already priced in, but dovish guidance triggered additional buying
RBI’s Policy Communication
- RBI Governor Sanjay Malhotra emphasized:
- Surplus liquidity would be maintained
- Accommodative stance means either a pause or further rate cuts
- Clarified: Policy stance is tied to repo rate expectations, not liquidity directly
- Monetary Tools Explained:
- Liquidity is a separate operational mechanism, used to enhance policy rate transmission, not necessarily tied to stance changes
Market Reactions & Forecast
- Anshul Chandak, Head of Treasury, RBL Bank:
- Interpreted the messaging as a precursor to deeper rate cuts
- Predicts 10-year bond yield could drop to 6.25% in the next 4–5 months
Rupee Weakens Further
- INR/USD Exchange Rate:
- Closed at ₹86.70, down from ₹86.26
- Marked the third consecutive session of depreciation
- Fell by 0.4% on the day
- Drivers: Expectations of lower interest rates and surplus liquidity weighed on the rupee
Broader Implications
- Bond Prices Rise: Inverse relation with yields drove up bond demand
- Currency Depreciation: Highlights reduced RBI focus on rupee defense in favor of growth support
- Investor Sentiment: Bond traders optimistic; currency markets more cautious
The RBI’s dovish policy tone has created a clear market expectation for continued rate cuts in FY26. With benchmark bond yields falling to multi-year lows, and the rupee weakening, the central bank appears firmly focused on stimulating growth, even if it means tolerating modest currency depreciation. Market experts anticipate further softening of yields, positioning India firmly in a pro-growth, easy money regime.
