Quote on Monthly Debt Market Outlook by Puneet Pal of PGIM India Mutual Fund
Below the Quote on Monthly Debt Market Outlook by Puneet Pal of PGIM India Mutual Fund
Fixed Income Commentary October 2025
Bond yields came down in October except for the very long end of the curve as RBI tilted on the dovish side in the MPC policy meeting on 1st October though it kept the policy rates unchanged. The inflation forecast for FY26 was lowered to 2.60%, 100bps lower than the 3.70% forecast given in the June MPC policy. The GDP growth forecast for FY26 was increased to 6.80% from 6.50% earlier. The MPC also retained the monetary policy stance at “Neutral” but two members Dr. Nagesh Kumar and Prof. Ram Singh opined that the monetary policy stance should be changed to “Accommodative”.
Uncharacteristically, the RBI governor’s statement also referred to INR weakness mentioning that “Notwithstanding the robust domestic macroeconomic fundamentals, the INR has witnessed some depreciation accompanied by phases of volatility. RBI is keeping a close watch on movements of the INR and will take appropriate steps, as warranted.” Since then, RBI is believed to have intervened both in the spot and the forwards market to support INR, which has drained liquidity putting pressure on money market yields despite the liquidity infused due to CRR cuts (50bps till end of October). The fall in yields, though fuelled by optimism on rate cut, was also helped by abatement of the bond market’s anxiety in respect of fiscal slippage as the projected revenue loss due to GST rationalisation is not expected to lead to any extra borrowings.
Consumer Price Index (CPI) inflation fell to an eight year low of 1.54%, implying an average of 1.7% for this quarter, lower than RBI’s forecast of 1.8%. It was the lowest CPI print since June 2017. Food inflation continues to be benign whereas “core” inflation picked up to 4.60% in September from 4.2% in August. Core CPI (excluding food, fuel, gold, gasoline) remained steady at 3.30% though higher than the August number of 3.1%. The core CPI number is the highest for the last 25 months, led by sharp rise in gold prices though GST cuts can lower core inflation going ahead. Core CPI was also impacted by an uncharacteristic increase in Housing Inflation by 0.8% month-on-month versus the pattern of an unchanged housing index in September on an average in the last 5yrs.
It is likely that RBI may further lower the inflation target in the next MPC meeting. The yield curve has steepened again in spite of lower borrowing at the longer end of the yield curve in H2. In fact, the yield movement was a contrast of two halves in October, wherein in the first half, yields fell across the curve but a weak auction at the longer end reignited the lingering fears of the adverse demand supply dynamics at the longer end of the curve, leading to rise in longer end yields in the second half of the month.
The longer end of the yield curve ended the month flat to slightly higher in yields whereas the benchmark 10yr Bond yield ended the month 5 bps lower at 6.53%. Sentiments remains weak with respect to the demand supply dynamics at the longer end of the yield curve and RBI may need to do more than a verbal intervention to arrest the rise in yields at the longer end. Some sections of the market are expecting RBI to start conducting OMO purchases given the fall in durable liquidity and the ongoing FX intervention of RBI. INR ended the month at 88.77, near its all-time low of USD 88.80 touched earlier during the month. This is despite RBI’s active intervention in the FX markets both in the spot as well as the forwards markets.
Robust FPI inflows continued in the bond markets with USD 1.97 bn inflows in October. The CYTD inflows stand at USD 8.16 bn, which is in contrast to the FPI outflows from equity markets seen in this calendar year. The 3 month maturity CDs are trading around 6.00%-6.05% while 1yr maturity CDs are trading in a range of 6.40%-6.50%. The OIS curve remained steady though in contrast to the G-Sec curve, it flattened with the 5yr OIS ending the month at 5.67% compared to 5.74% at the end of September. The 1yr OIS was higher on the month by 2 bps at 5.47%.
Globally, bond yields softened as the US Fed reduced policy rates further but the Fed Chairman did not give any guarantees of a rate cut in December, preferring to remain data dependent. The US yield curve also steepened.
We believe that RBI will conduct OMO purchases starting next quarter as banking liquidity reduces due to higher Currency in Circulation (CIC) and the continuing FX intervention by RBI. The bond market is still struggling to come to terms with the adverse demand supply dynamics even after the reduction in H2 borrowing amounts at the longer end and the reduced SDL supply in this quarter. The realization is dawning on the bond markets that we are at the end of the rate cutting cycle even though there can be one more rate cut.
Going ahead, we expect range bound movement in yields and expect the 10yr bond yield to trade in a range of 6.30% to 6.70% over the next couple of months. We expect the SDL curve to outperform over the medium term.
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