What’s going on here?
Indian government bond yields stayed calm this morning, with the 10-year yield at 6.8624% at 9:40 a.m. IST, just a smidge below yesterday’s 6.8632% close.
What does this mean?
Stable bond yields are a sign that traders are in wait-and-see mode ahead of the Reserve Bank of India’s (RBI) big announcement at 10:00 a.m. IST. Most analysts think the RBI will keep rates unchanged according to the latest Reuters poll, while some economists anticipate rate cuts of 50-75 basis points between October and December. Vikas Jain from Bank of America even predicts a 100 bps cut. Meanwhile, since early July, there’s been a significant liquidity surplus in India’s banking system, with daily averages hitting two-year highs. This has been driven by increased government spending, currency inflows, and the RBI’s dollar purchases.
Why should I care?
For markets: Steady hands on bond yields.
Market watchers are laser-focused on the RBI’s next steps, especially regarding liquidity management. Expectations are high for variable rate reverse repos to keep call rates close to the repo rate. Traders are also eyeing ongoing debt sales in the secondary market and possible forex interventions to manage rupee liquidity. Talk of raising transaction limits for foreign investors in overnight index swaps could suggest a more inclusive policy approach.
The bigger picture: RBI’s inflation ambitions.
According to HSBC, the RBI will likely maintain its current policy stance while expressing greater confidence in hitting its 4% inflation target. This confidence is expected to come from recent liquidity surpluses and macroeconomic stability thanks to proactive measures by the government and central bank. Reaching the inflation target would signal a steady financial climate, boosting both domestic and foreign investor confidence in India’s economic strategy.