The benchmark 10-year government bond continued to decline throughout the week after the central bank approved a record surplus transfer to the government, boosting demand. The 10-year yield had dipped below the psychological resistance level of 7 per cent to 6.99% when the Reserve Bank of India approved the transfer of a record Rs 2.11 trillion worth of dividends to the government from the previous fiscal year. However, currently, the 10-year benchmark yield stands at 7.03 per cent but improved significantly from last week's close of 7.08 per cent. The yield surged mildly after Wednesday as traders took to waiting for new debt supply, coupled with US Treasury yields experiencing a slight uptick.
RBI's surplus transferred to the government at Rs 2.11 trillion was much higher than 874.16 billion rupees in the previous fiscal and also widely beat the market and budgetary estimates.
Meanwhile, the Reserve Bank of India's buyback of dated securities on May 21, 2024, worth Rs 60,000 was undersubscribed. Notably state governments have ramped up the volume of the auction of securities compared to how much it auctioned in previous months. As many as nine state governments have announced an auction through the Core Banking Solution (E-Kuber) system on May 28, 2024, to raise a total of Rs 21,200 crore.
The indicative yield for T-bills currently stands at 6.85 per cent, 7.01 per cent, and 7.02 per cent for three-month, six-month, and 364-day durations, respectively. In the 1-2 year tenure, the 5.63% GS 2026 indicates a yield of 6.98 per cent.
Moving on to longer tenures, the 7.10% GS 2029 (4-5 year tenure) and the 7.18% GS 2033 (9-10 year range) both show indicative yields of 7.03 per cent.
Bonds have reacted positively this week to market movements as RBI announced higher dividends which dealers feel have the potential to counteract any impact the election norms have on government borrowing.
Market experts feel that the 10-year yield will inch down further below the 7 per cent psychological resistance mark. Currently, the liquidity crunch in the banking system can only keep yields at an elevated level till the election. When the government starts spending, it will infuse liquidity into the system, leading to softening of yields.
The government had earlier indicated many G-sec buyback plans to support the RBI balance sheet. It remains to be seen if there have been any changes in government plans following RBI's disbursal of high dividends to the exchequer.
Experts forecast significant inflows of USD 20 billion to USD 25 billion into India's debt market. The reason they attribute to this inflow is the inclusion of Indian government bonds in the JPMorgan GBI-EM in June 2024, and further another inclusion in Bloomberg’s Emerging Market Local Currency Government Index in January 2025.In the latest Fed meeting minutes released this week, Fed members indicated that the disappointing findings related to first-quarter inflation may delay rate cuts in the near term. Fed policymakers seem to want inflation to reach the 2 per cent target in the medium term before considering lowering rates.
