Indian bonds have witnessed buying interest, thanks to several factors that have aligned favourably. The yield on the 10-year g-sec plunged to 7.146 on January 16, taking the benchmark bond to its lowest since September 21, 2023.
The fall in bond yields has many implications, not least that it could nudge the Reserve Bank of India’s (RBI) to cut interest rates sooner.
A fall in bond yields is a positive as yields move inversely to prices. Basically, if investors are buying a lot of bonds, the prices of bonds move up and the competition to buy leads investors to accept bonds at lower yields.
Key reasons for the bond rally
Below are some of the key reasons for the fall in yields.
1. The immediate trigger was the release of the December consumer price index (CPI) data, which came in at 5.69%, much lower than 6% plus number that economists were expecting. The latest print meant that the rise in consumer prices averaged 5.4%, well below the Reserve Bank’s 5.6% forecast. The RBI has a 2-6% comfort range for inflation.
2. The fall in Indian prices is not the only positive. Disinflation is a trend that is seen in the US as well, where producer prices fell 0.1% in December, according to data released two days ago, compared to an expectation of a 0.1% rise.
3. Foreign portfolio investors have been buying Indian bonds in large quantities, with data showing purchases worth $108 million in a single day on January 12.
4. Another big positive was the announcement that states were going to borrow ₹19,000 crore from the market, lower than the expected nearly ₹22,000 crore. Lower borrowing indicates that states’ fiscal position is more comfortable than thought, leading investors to be more bullish on the country’s bonds.
Also Read | Worst is behind: Morgan Stanley’s Chetan Ahya says US bond yield has peaked, sees 4.2% on 10-year soon
What this means for markets, economy and consumer
The fall in inflation could prompt the Reserve Bank’s monetary policy committee (MPC) to cut interest rates sooner than expected.
The MPC has upped the benchmark repo rate six times since April 2022, from a low of 4% to 6.5% currently. It has also named its stance “as withdrawal of accommodation”, referring to the low rates that the economy enjoyed before the hike. Economists at Citi India and ICICI Securities Primary Dealership say this stance may now change to “neutral” as early as in February.
The RBI has held on the current repo rate of 6.5% for nearly a year, and a change to a neutral stance will precede any rate cut that can come through in future. A rate cut in the repo rate will have a cascading effect on bank loan rates, including consumer loans and will help cut EMIs.
The fall in bond prices also mean lower borrowing costs for the government, as well as for corporates as other bonds in India are priced relative to the benchmark government bond.
Lower borrowing costs lead to better earnings for companies, which could then benefit the stock market.
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