RBI Decision Poised to Influence India's Bond Market Dynamics

India's 10-year government bond yield may decrease further if the RBI announces a rate cut exceeding 25 basis points in June. As the market anticipates this policy shift, global trends and domestic liquidity are prompting a steepening yield curve, impacting investor sentiment and market liquidity.

In the upcoming monetary policy announcement on June 6, all eyes are on the Reserve Bank of India (RBI) as its decision could catalyze further declines in India's benchmark 10-year government bond yield. Bank of Baroda's recent report highlights that a policy rate cut greater than the widely anticipated 25 basis points might lead to additional downward momentum in bond yields.

The report suggests India's 10-year bond yield will fluctuate between 6.15 and 6.27 percent in June. This follows global trends, where bond yields rose in May due to U.S. debt concerns, causing a risk-averse stance among investors. Conversely, India's bond yields softened, accentuating a steepening of the country's yield curve, particularly sensitive to liquidity changes.

An excess liquidity of 0.7 percent of Net Demand and Time Liabilities (NDTL) in May was noted, contributing to this trend. The report foresees potential liquidity pressures from government cash balance increases. However, the RBI's strategies, including a substantial dividend transfer to the government, aim to mitigate these pressures. The central bank's forthcoming decision is pivotal for bond market directions.

(With inputs from agencies.)