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Economic Times
6 days ago
- Business
- Economic Times
India's bond market signals extended rate pause despite low inflation
Bond dealers said the spread between the 10-year yield and the repo rate was lower in early 2025 because RBI's open market operations skewed the demand-supply balance in favour of bonds as the central bank absorbed much of the supply. India's bond market indicates a likely pause in the RBI's rate-easing cycle, despite retail inflation hitting an eight-year low. A surge in yields has significantly widened the spread between 10-year bonds and the repo rate, signaling market expectations of sustained policy hold. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Mumbai: India' bond market is signalling a long pause in the central bank's rate-easing cycle despite the retail inflation gauge falling to an eight-year low of 1.55%, way below Mint Road's ordinary legal mandate of 4%. A spike in yields has widened the spread between 10-year bonds and the repo rate to almost one percentage point-the most in 2025. "The widening of the spread between the 10-year yield and repo rate is an indication that the market is pricing in an extended policy pause," said Churchil Bhatt, executive vice-president, investment, Kotak Mahindra Life Insurance. "After the last monetary policy , market participants believe that the bar for further rate cuts is fairly high. Traders have given up hopes of an October rate cut."The spread widened to 99 basis points on Tuesday, compared with around 20 bps just before the Reserve Bank of India (RBI) started the rate-cutting cycle in February under its new governor Sanjay Malhotra. One basis point is a hundredth of a percentage traders now expect 5.5% as the terminal repo rate, against 5% expected before last week's policy. The central bank has eased rates by a cumulative one percentage point this as measured by the consumer price index (CPI) fell to 1.55% in July, below the lower bound of the central bank's target range of 2-6% with 4% as the mid-point. Economists had anticipated a CPI reading of below 2%.However, despite the low CPI print, the bond markets are not pricing in a rate cut in October because the central bank's projections show inflation would climb toward the end of FY26. The yield on the benchmark 10-year paper, which serves as the basis for pricing of corporate loans, closed on Tuesday at 6.49%, the highest since early central bank kept rates on hold and continued with a 'neutral' monetary policy stance last week. While this was expected, the absence of dovish stance along with RBI's inflation forecast of 4.9%-higher than its medium-term target-for the first quarter of next fiscal year dampened hopes of rate cut in October unless there is a sharp growth shock-whether domestic or external. Last week, the RBI retained the growth projection at 6.5%. "The combined fear of the rate cut cycle ending and a higher fiscal deficit-caused by weaker revenue and easing measures to support sectors hit by tariffs-has soured sentiment for the market," said Abhishek Upadhay, economist at ICICI Securities Primary dealers said the spread between the 10-year yield and the repo rate was lower in early 2025 because RBI's open market operations skewed the demand-supply balance in favour of bonds as the central bank absorbed much of the supply. The current widening of the spread should also, therefore, be viewed in the context of the absence of this demand.
Time of India
6 days ago
- Business
- Time of India
India's bond market signals extended rate pause despite low inflation
Mumbai: India' bond market is signalling a long pause in the central bank's rate-easing cycle despite the retail inflation gauge falling to an eight-year low of 1.55%, way below Mint Road's ordinary legal mandate of 4%. A spike in yields has widened the spread between 10-year bonds and the repo rate to almost one percentage point-the most in 2025. "The widening of the spread between the 10-year yield and repo rate is an indication that the market is pricing in an extended policy pause," said Churchil Bhatt, executive vice-president, investment, Kotak Mahindra Life Insurance. "After the last monetary policy , market participants believe that the bar for further rate cuts is fairly high. Traders have given up hopes of an October rate cut." The spread widened to 99 basis points on Tuesday, compared with around 20 bps just before the Reserve Bank of India (RBI) started the rate-cutting cycle in February under its new governor Sanjay Malhotra. One basis point is a hundredth of a percentage point. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like Wildlife Cameras Capture What No One Should See Ohi Blog Undo Bond traders now expect 5.5% as the terminal repo rate, against 5% expected before last week's policy. The central bank has eased rates by a cumulative one percentage point this year. Bonds Corner Powered By RBI allows non-residents to invest rupee surplus in vostro accounts in G-secs The Reserve Bank of India (RBI) on Tuesday said non-residents maintaining special rupee vostro accounts (SRVA) can invest surplus balances in central government securities (G-secs). Debt funds witness best month of FY25 as investors return to safety and yield Indian bonds muted ahead of domestic, US CPI data Bond yields climb to steepest since April at 6.44% India bonds rangebound ahead of state debt supply, CPI data Browse all Bonds News with Inflation as measured by the consumer price index (CPI) fell to 1.55% in July, below the lower bound of the central bank's target range of 2-6% with 4% as the mid-point. Economists had anticipated a CPI reading of below 2%. However, despite the low CPI print, the bond markets are not pricing in a rate cut in October because the central bank's projections show inflation would climb toward the end of FY26. The yield on the benchmark 10-year paper, which serves as the basis for pricing of corporate loans, closed on Tuesday at 6.49%, the highest since early April. Live Events The central bank kept rates on hold and continued with a 'neutral' monetary policy stance last week. While this was expected, the absence of dovish stance along with RBI's inflation forecast of 4.9%-higher than its medium-term target-for the first quarter of next fiscal year dampened hopes of rate cut in October unless there is a sharp growth shock-whether domestic or external. Last week, the RBI retained the growth projection at 6.5%. "The combined fear of the rate cut cycle ending and a higher fiscal deficit-caused by weaker revenue and easing measures to support sectors hit by tariffs-has soured sentiment for the market," said Abhishek Upadhay, economist at ICICI Securities Primary Dealership. Bond dealers said the spread between the 10-year yield and the repo rate was lower in early 2025 because RBI's open market operations skewed the demand-supply balance in favour of bonds as the central bank absorbed much of the supply. The current widening of the spread should also, therefore, be viewed in the context of the absence of this demand.
Time of India
16-06-2025
- Business
- Time of India
How will RBI's STRIPS facility impact insurance companies?
Mumbai: The Reserve Bank of India last week allowed the STRIPS (Separate Trading of Registered Interest and Principal of Securities) facility in state government bonds-a seemingly technical change that could be a game changer for insurers. This facility is expected to allow insurance companies to manage cash flows and align their income from investments with future pay-outs to policyholders. STRIPS allows bond traders to strip principal and coupon payments and sell them separately. That means, the cash flows of a bond can be bought and sold. Bonds Corner Powered By How will RBI's STRIPS facility impact insurance companies? The Reserve Bank of India's decision to allow STRIPS in state government bonds is poised to revolutionize cash flow management for insurers. This move enables insurers to sell near-term asset inflows, aligning investment income with long-term policy payouts. STRIPS in state bonds offer a yield advantage and reduce reinvestment risk, making them attractive for long-term investors. RBI cancels 30-year green bond auction amid high bids India bond yields hit 5-week high as surging oil prices add to bearishness before auction RBI allows trading of state govt securities in STRIPS Banks see 15% rise in non-SLR investments in FY25 amid strong market returns Browse all Bonds News with "Insurance companies have long-term liabilities in our books, with little need for cash in the near term. STRIPS enables us to sell our near-term asset inflows, allowing better matching of our asset and liability cash flows," said Churchil Bhatt, executive vice president-investment at Kotak Mahindra Life Insurance Company. "STRIPS in state bonds add a dash of yield uptick to the already existing dual benefits of the product, namely additional duration and reduction in reinvestment risk," he added. Live Events STRIPS are bought at a deep discount and redeemed at face value, making them attractive to long-term, hold-to-maturity investors such as insurers, pension funds and passive debt funds. A key appeal of STRIPS in state bonds is their 30- to 40-basis-point yield pickup over STRIPS in central government securities (G-sec), along with the same sovereign backing, said Venkatakrishnan Srinivasan, managing partner, Rockfort Fincap, a fixed-income institutional advisory firm. In a notification on Thursday, the RBI said all fixed-coupon bonds issued by state governments with a residual maturity of up to 14 years and a minimum outstanding of Rs1,000 crore are eligible for STRIPS. However, these securities must be eligible for meeting the bank's statutory liquidity ratio requirements. Insurance companies have seen higher demand over the past few years for long-term products offering guaranteed returns. These companies look to deploy the inflows in such products in long-term assets like G-Secs and state bonds. According to bond market participants, STRIP has been permitted in eligible central government securities since April 2010. Extension of STRIPS will also help insurers reduce reinvestment risk, referring to the possibility of investors not being able to deploy proceeds from bonds at a desirable rate of interest. Transaction volumes in STRIPS have increased in recent years. According to data published by Clearing Corporation of India, the face value of STRIPS trades in G-secs rose to ₹2.47 lakh crore in FY25 from ₹38,383 crore pre-Covid in FY20. ETMarkets WhatsApp channel )
Economic Times
16-06-2025
- Business
- Economic Times
How will RBI's STRIPS facility impact insurance companies?
Transaction volumes in STRIPS have increased in recent years. According to data published by Clearing Corporation of India, the face value of STRIPS trades in G-secs rose to ₹2.47 lakh crore in FY25 from ₹38,383 crore pre-Covid in FY20. The Reserve Bank of India's decision to allow STRIPS in state government bonds is poised to revolutionize cash flow management for insurers. This move enables insurers to sell near-term asset inflows, aligning investment income with long-term policy payouts. STRIPS in state bonds offer a yield advantage and reduce reinvestment risk, making them attractive for long-term investors. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Mumbai: The Reserve Bank of India last week allowed the STRIPS (Separate Trading of Registered Interest and Principal of Securities) facility in state government bonds-a seemingly technical change that could be a game changer for facility is expected to allow insurance companies to manage cash flows and align their income from investments with future pay-outs to allows bond traders to strip principal and coupon payments and sell them separately. That means, the cash flows of a bond can be bought and sold."Insurance companies have long-term liabilities in our books, with little need for cash in the near term. STRIPS enables us to sell our near-term asset inflows, allowing better matching of our asset and liability cash flows," said Churchil Bhatt, executive vice president-investment at Kotak Mahindra Life Insurance Company."STRIPS in state bonds add a dash of yield uptick to the already existing dual benefits of the product, namely additional duration and reduction in reinvestment risk," he are bought at a deep discount and redeemed at face value, making them attractive to long-term, hold-to-maturity investors such as insurers, pension funds and passive debt funds. A key appeal of STRIPS in state bonds is their 30- to 40-basis-point yield pickup over STRIPS in central government securities (G-sec), along with the same sovereign backing, said Venkatakrishnan Srinivasan, managing partner, Rockfort Fincap, a fixed-income institutional advisory a notification on Thursday, the RBI said all fixed-coupon bonds issued by state governments with a residual maturity of up to 14 years and a minimum outstanding of Rs1,000 crore are eligible for STRIPS. However, these securities must be eligible for meeting the bank's statutory liquidity ratio companies have seen higher demand over the past few years for long-term products offering guaranteed returns. These companies look to deploy the inflows in such products in long-term assets like G-Secs and state to bond market participants, STRIP has been permitted in eligible central government securities since April 2010. Extension of STRIPS will also help insurers reduce reinvestment risk, referring to the possibility of investors not being able to deploy proceeds from bonds at a desirable rate of volumes in STRIPS have increased in recent years. According to data published by Clearing Corporation of India, the face value of STRIPS trades in G-secs rose to ₹2.47 lakh crore in FY25 from ₹38,383 crore pre-Covid in FY20.
Economic Times
06-06-2025
- Business
- Economic Times
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. Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads 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 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 five-year 6.75% 2029 bond yield was at 5.8100%, after ending at 5.8514%. Bond yields were volatile after the RBI 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 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.'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 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 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 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 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 read: RBI's bazooka sends Sensex, Nifty soaring. What does it mean for stock market investors However, long-term yields, like the 10-year benchmark, are typically shaped by broader factors such as inflation expectations, fiscal outlook, and economic growth.(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
