2025-12-30 05:00:40 pm | Source: PGIM India Mutual Fund
Quote on Weekly Fixed Income by Puneet Pal of PGIM India Mutual Fund
Below the Quote on Weekly Fixed Income by Puneet Pal of PGIM India Mutual Fund
Bond yields may go down by another 10-15 bps going ahead
Our View:
There seems to be a lack of appetite for bonds in the Indian market despite a dovish RBI, who is doing persistent OMOs. CYTD, RBI has done almost INR 6.50 trn of OMOs so far with an additional INR 1.50 trn to go next month. We believe that bond yields can go down by another 10-15 bps over the course of the next few months and markets will be keenly watching the supply of SGS (state government securities) for the next quarter. The market is expecting INR 4.5 trn of SGS supply next quarter and any meaningful reduction will be supportive of bonds.
Investors can continue to allocate to Corporate Bond Funds having portfolio maturity up to 5yrs while being tactical in their allocation to duration through Dynamic Bond Funds. Investors should have a minimum investment horizon of 12-18 months while investing. Money Market yields of up to 1yr are also looking attractive relatively from a risk-reward perspective. Investors with short term investing horizon can look to allocate in this segment also. We expect a long pause on policy rates and expect the 10yr benchmark bond yield to trade in a range of 6.35% to 6.75% over the course of the next few months.
Indian Markets:
Bond yields have edged higher this month despite a dovish MPC policy earlier in the month as bond markets continue to grapple with adverse demand/supply dynamics. A dovish MPC policy at the start of the month failed to enthuse the bond markets even as RBI announced INR 1 trn of OMO purchases and USD 5 bn of USD INR swap to ease liquidity.
Yields have risen across the curve with the benchmark 10yr Bond yield rising 6 bps from the start of the month, currently trading at 6.56% after rising to a high of 6.67%. Yields at the longer end of the yield curve have remained flat, faring better than the rest of the curve. Value buying emerged as yields at the longer end of the yield curve inched towards 7.50%. INR became the focus of the markets as it depreciated sharply to touch an all-time low against the USD at 91.03 against the November closing of 89.46. INR volatility further dampened the sentiments in the bond markets. Following the persistent rise in yields, RBI came out all guns blazing by announcing incremental OMOs of INR 2 trn coupled with a USD 10bn USDINR swap, thus promising to inject close to INR 3 trn of liquidity by end of January 2026.
This gave a boost to bond yields and yields have started to moderate though markets remain quite cautious. The perceived end of the rate cutting cycle and the continuous lingering adverse demand/supply situation has led to yields trending higher over the last 5 months. The 10yr bond yield has fallen by just 20bps this calendar year while the 40yr yields have risen by 25bps despite 125 bps of policy rate cuts and over INR 6 trn of OMO purchases by RBI in this calendar year. The CRR has also been cut by 100bps and despite such liquidity easing measures, the durable liquidity in the banking system has fallen from its high of INR 5.84 trn in May 2025 to the current durable liquidity surplus of INR 2.60 trn as of November 2025.
Earlier in the month, CPI Inflation came in at 0.71%, which was in line with expectations. “Core” CPI Inflation was steady at 4.4% though excluding gold, etc., the so called “core” inflation softened to 2.40%. Though CPI inflation seems to have bottomed, it is still expected to remain in the vicinity of 4.00% in FY27, thus enabling RBI to be on a longish hold. Trade deficit for the month of November narrowed and came in at USD 24.50bn, down from an all-time high of USD 42bn reported in October. A sharp fall in Gold imports by USD 11bn helped moderate the trade deficit. Non-oil exports also grew (20% YOY). Current account deficit for FY 26 is expected to come in around 1.20%, almost double of FY25, which was at 0.60%.
RBI’s intervention in the FX markets picked up as INR breached 91 against the USD. The approach of RBI seems to allow for calibrated INR depreciation. RBI’s outstanding position in USD forwards is estimated to be USD63bn as of October end. FPIs sold Indian debt for the first time since June as they have sold USD 1.50 bn from debt so far this month. Outflows from equity continued this month also with USD 1.30bn of PFI outflows. On a CYTD basis FPI inflows into debt stand at USD 6.16bn. There is optimism regarding Indian FAR government bonds getting included in the Bloomberg Global Aggregate Bond Index, which can lead to more flows next year.
The OIS curve saw bear steepening with the 5yr OIS yield going up by 17 bps while the 1yr OIS yield was up by 1 bps. Money Market liquidity remained in deficit, though RBI has been managing liquidity proactively by conducting VRRs. The 3-month maturity CD yields are trading around 6.05% and 1yr maturity CDs are trading around 6.60%.
International Markets:
Bond yields have remained elevated across developed markets and the benchmark US 10yr yield continues to stay above 4% even after the Fed rate cut. Japanese bond yields continue to rise, fuelling some concerns around the unwinding of “carry trades,” though there is no major dislocation in the global markets so far.
Investors can continue to allocate to Corporate Bond Funds having portfolio maturity up to 5yrs while being tactical in their allocation to duration through Dynamic Bond Funds. Investors should have a minimum investment horizon of 12-18 months while investing. Money Market yields of up to 1yr are also looking attractive relatively from a risk-reward perspective. Investors with short term investing horizon can look to allocate in this segment also. We expect a long pause on policy rates and expect the 10yr benchmark bond yield to trade in a range of 6.35% to 6.75% over the course of the next few months.
Indian Markets:
Bond yields have edged higher this month despite a dovish MPC policy earlier in the month as bond markets continue to grapple with adverse demand/supply dynamics. A dovish MPC policy at the start of the month failed to enthuse the bond markets even as RBI announced INR 1 trn of OMO purchases and USD 5 bn of USD INR swap to ease liquidity.
Yields have risen across the curve with the benchmark 10yr Bond yield rising 6 bps from the start of the month, currently trading at 6.56% after rising to a high of 6.67%. Yields at the longer end of the yield curve have remained flat, faring better than the rest of the curve. Value buying emerged as yields at the longer end of the yield curve inched towards 7.50%. INR became the focus of the markets as it depreciated sharply to touch an all-time low against the USD at 91.03 against the November closing of 89.46. INR volatility further dampened the sentiments in the bond markets. Following the persistent rise in yields, RBI came out all guns blazing by announcing incremental OMOs of INR 2 trn coupled with a USD 10bn USDINR swap, thus promising to inject close to INR 3 trn of liquidity by end of January 2026.
This gave a boost to bond yields and yields have started to moderate though markets remain quite cautious. The perceived end of the rate cutting cycle and the continuous lingering adverse demand/supply situation has led to yields trending higher over the last 5 months. The 10yr bond yield has fallen by just 20bps this calendar year while the 40yr yields have risen by 25bps despite 125 bps of policy rate cuts and over INR 6 trn of OMO purchases by RBI in this calendar year. The CRR has also been cut by 100bps and despite such liquidity easing measures, the durable liquidity in the banking system has fallen from its high of INR 5.84 trn in May 2025 to the current durable liquidity surplus of INR 2.60 trn as of November 2025.
Earlier in the month, CPI Inflation came in at 0.71%, which was in line with expectations. “Core” CPI Inflation was steady at 4.4% though excluding gold, etc., the so called “core” inflation softened to 2.40%. Though CPI inflation seems to have bottomed, it is still expected to remain in the vicinity of 4.00% in FY27, thus enabling RBI to be on a longish hold. Trade deficit for the month of November narrowed and came in at USD 24.50bn, down from an all-time high of USD 42bn reported in October. A sharp fall in Gold imports by USD 11bn helped moderate the trade deficit. Non-oil exports also grew (20% YOY). Current account deficit for FY 26 is expected to come in around 1.20%, almost double of FY25, which was at 0.60%.
RBI’s intervention in the FX markets picked up as INR breached 91 against the USD. The approach of RBI seems to allow for calibrated INR depreciation. RBI’s outstanding position in USD forwards is estimated to be USD63bn as of October end. FPIs sold Indian debt for the first time since June as they have sold USD 1.50 bn from debt so far this month. Outflows from equity continued this month also with USD 1.30bn of PFI outflows. On a CYTD basis FPI inflows into debt stand at USD 6.16bn. There is optimism regarding Indian FAR government bonds getting included in the Bloomberg Global Aggregate Bond Index, which can lead to more flows next year.
The OIS curve saw bear steepening with the 5yr OIS yield going up by 17 bps while the 1yr OIS yield was up by 1 bps. Money Market liquidity remained in deficit, though RBI has been managing liquidity proactively by conducting VRRs. The 3-month maturity CD yields are trading around 6.05% and 1yr maturity CDs are trading around 6.60%.
International Markets:
Bond yields have remained elevated across developed markets and the benchmark US 10yr yield continues to stay above 4% even after the Fed rate cut. Japanese bond yields continue to rise, fuelling some concerns around the unwinding of “carry trades,” though there is no major dislocation in the global markets so far.
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