Short-term govt bond yield may fall as RBI cuts T-bill supply by Rs 60K cr | Economy & Policy News

“As the issuance amount is reduced, that liquidity will not be absorbed and will now come into the system, which will lead to the fall in yields of short-term bonds,” said a dealer at a state-owned bank. “We are expecting around a 6 basis point fall in the yield on short-term bonds,” he added.

The yield on the 5-year government bond settled at 7.09 per cent on Friday.

Market participants believe this move by the central bank is an attempt to steepen the yield curve.

“The yield curve is flattish right now, and the RBI wants to lower yields for short-term bonds,” said a dealer at another state-owned bank. “We can see that longer tenure is in demand right now,” he added.

Traders have been stocking up on long-term bonds with 10-year and 14-year maturities ahead of the inclusion of domestic bonds in global indices, said market participants.

“The concentration is in long-term bonds like 10-year and 14-year bonds because there is an expectation of capital appreciation after bond inclusion. The short-term bonds are not in demand because a rate cut is not in sight,” said a dealer at another state-owned bank.

While the US Federal Reserve is expected to start cutting rates in September of the current year, on the domestic front, traders expect the rate-setting panel to initiate rate cuts only in March 2025. Some traders expect the domestic rate cut to start in the latter half of the next financial year (2025-26).

In September 2023, JPMorgan announced the inclusion of India’s bonds into the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) starting June. Subsequently, on March 5 of the current year, Bloomberg Index Services revealed that Indian government bonds would be added to its Emerging Market Local Currency Government Index starting January 31, 2025.

First Published: May 20 2024 | 5:59 PM IST