Context:
The Reserve Bank of India (RBI) has expressed concerns over persistently high 10-year government bond yields, even after policy rate cuts, and is engaging with market participants on possible interventions. The spread between India’s 10-year bond and the US 10-year Treasury has widened to roughly 244 basis points (bps), up from 219 bps at the start of 2025.
Key Highlights:
- Policy Rate vs. Bond Yields:
- Despite a cumulative 100-bps repo rate cut between February and June, yields have not eased and have slightly risen since the 50-bps cut in June.
- Benchmark 10-year government bond yield currently 6.53%, while US 10-year Treasury yield fell by 32 bps in the same period.
- Market Response:
- RBI cancelled a 7-year bond auction last week due to higher yield demands from the market.
- Market participants have requested open market operations (OMO) to inject liquidity and soften yields.
- However, OMO announcement is unlikely in November, as the last tranche of June CRR cut is pending (scheduled end-November).
- Upcoming Auctions:
- Focus on 10-year bond auction (₹ 32,000 crore) on November 8 for further yield cues.
- Cut-off yield expected to rise by 3-4 bps from previous 6.48% coupon.
- Auction Methodology Requests:
- Participants have suggested state government securities auctions adopt uniform pricing instead of the current multiple-price method to streamline market operations.
- Market Stress:
- Banks are holding mark-to-market losses, reducing their Statutory Liquidity Ratio (SLR) holdings, making them cautious in bidding for additional bonds.
