RBI's 50 bps rate cut sparks short-term bond rally, long-term yields stay subdued. What's ahead?

Time of India

2 days ago

India's short-term government bonds rose on Friday, buoyed by the central bank's monetary policy announcements, including a larger-than-expected 50 basis point rate cut, which were viewed as particularly supportive for the shorter end of the yield curve. In contrast, the more liquid long-term bonds remained largely muted.
The yield on India's benchmark 10-year government bond rose to 6.2200% around 1:25 pm on Friday, up from 6.1960% at Thursday's close.
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The five-year 6.75% 2029 bond yield was at 5.8100%, after ending at 5.8514%. Bond yields were volatile after the RBI announcement.
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RBI's 50 bps rate cut sparks short-term bond rally, long-term yields stay subdued. What's ahead?
India's short-term government bonds rallied after the RBI's surprise 50 bps rate cut, while long-term yields remained largely stable. The central bank's dovish tilt and liquidity infusion via a cumulative 100 bps CRR cut added to the positive momentum. Experts expect monetary transmission to improve, with shorter-end yields benefiting the most amid a data-dependent policy outlook.
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The RBI lowered its key repo rate to 5.50%, marking its third consecutive cut, as subdued inflation gave policymakers room to shift their focus toward boosting economic growth.
The central bank has lowered rates by a total of 100 basis points in 2025 so far, beginning with a 25 basis point cut in February. Additionally, the Central Bank reduced the CRR by a cumulative 100 bps in four equal tranches, adding almost INR 2.5 Lakh crore to banking system liquidity.
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'Larger than expected move on the Repo Rate, offset by the hardening of the policy stance, may be seen as a front-loading of future policy action. CRR, on the other hand, is a surprise for the market,' noted Churchil Bhatt, Executive Vice President - Investment at Kotak Mahindra Life Insurance Company.
RBI has also moved its full-year inflation forecast lower to 3.7% from 4.0% while affirming its confidence in a robust growth trajectory.
'Overall, we expect moderate steepening of the Government Bond yield curve, with shorter-end yields and spread assets benefitting from the surprise liquidity bonanza,' Bhatt added.
He believes that these policy actions will also accelerate monetary transmission, resulting in lower bank lending rates. Going forward, he expects to see a data-dependent approach to RBI, with most of the heavy lifting behind us.
Bond yields and RBI interest rates have an inverse relationship, meaning when the RBI cuts interest rates (like the 50 basis point repo rate cut in this case), bond yields, particularly on shorter-duration government bonds, typically fall.
This is because new bonds will offer lower returns, making existing higher-yielding bonds more attractive, thereby driving up their prices and pushing yields down. Short-term yields are more directly influenced by such rate cuts and tend to respond quickly.
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However, long-term yields, like the 10-year benchmark, are typically shaped by broader factors such as inflation expectations, fiscal outlook, and economic growth.