June tune

The yield on the 10-year benchmark government security (G-sec; 7.10% GS 2034) opened June at 6.95% and closed at 7.01%, up 2 basis points (bps) from its May close of 6.99% and within CRISIL’s forecast range of 7.01-7.11%.

In the first week of the month, the 10-year benchmark bond yield remained volatile due to uncertainties related to fiscal policy and the political scenario amid general election results. The 10-year benchmark G-sec yield opened the week at 6.95%, down 4 bps from its previous close of 6.99%, and closed at 7.02%. An 8 bp decline in United States (US) Treasury yields provided some support to domestic bonds. Movement across the curve remained mixed after the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) stood pat on both policy rates and its stance on Friday. The MPC kept the repo rate unchanged at 6.5%, raised the gross domestic product (GDP) growth forecast for fiscal 2025 to 7.2%, and kept the inflation forecast for the fiscal unchanged at 4.5%.

In the second week, domestic bond yields eased as inflation based on the Consumer Price Index (CPI) printed lower at 4.75% for May, compared with 4.83% the previous month. A decline in US Treasury yields due to lower-than expected US CPI also provided some support to domestic bonds. Following this, the 10-year benchmark G-sec yield closed the week at 6.98%, down 4 bps on-week.

During the second half of the month, yields moved in a narrow range due to the absence of significant cues. Buying momentum from foreign portfolio investors (FPIs) remained strong as they invested ~9,900 crore ahead of the inclusion of Indian gilts in the JP Morgan Bond Index. However, a record-low rupee and redemption pressure drove mutual funds to sell, which weighed on bond yields.

Towards the end of the month, traders remained watchful of foreign exchange inflows and avoided placing aggressive bets. The cut-off prices at the weekly G-sec auction were below market expectations, and FPI purchases failed to lift prices following the inclusion of bonds in the JP Morgan Bond Index. This resulted in the 10-year benchmark G-sec yield closing June at 7.01%.

That said, the minutes of the MPC meeting were in line with market expectations. The committee maintained its stance on withdrawing accommodation to ensure inflation progressively aligns with the target while supporting economic growth.