Easing May

The yield on the 10-year-old benchmark government security (G-sec; 7.10% GS 2034) opened May at 7.13% and closed at 6.99%, down 21 basis points (bps) from its April close of 7.20% and below CRISIL’s forecast range of 7.07-7.17%.

Shorter-tenure government bond yields declined in the first week of the month, with the government deciding to repurchase short-term government bonds maturing within six to nine months. The 10-year benchmark bond yield also softened, tracking the decline in Unites States (US) Treasury yields. The Reserve Bank of India (RBI) conducted a buyback of G-secs, receiving offers totalling Rs 17,384.552 crore, but accepting only Rs 10,513 crore; this, despite the notified amount being Rs 40,000 crore. The 10-year benchmark G-sec closed the week at 7.08%.

The domestic bond yields eased in the second week tracking United States (US) Treasury yields, which declined after a softer-than-expected US consumer price index (CPI) data print and lower crude oil prices. Liquidity hovered in deficit zone between Rs 0.94 lakh crore and Rs 1.5 lakh crore, prompting the RBI to conduct a 14-day variable rate repo (VRR) auction on May 17 for a notified amount of Rs 125,000 crore. The 10-year benchmark G-sec closed the week at 7.05%.

Bond yields eased in the third week after the RBI Board approved the transfer of Rs 2.11 lakh crore as dividend to the central government, well above the market expectation of Rs 1 lakh crore. This would help the government attain the fiscal deficit target of 4.5% set for fiscal 2026 and may reduce its borrowing this fiscal. The yields were anchored through the holiday-truncated week owing to lower Treasury bill (T-bill) auction cut-offs after the announcement of lower borrowing of T-Bills. The cut-offs were 14 bps lower for 91-day, 7 bps for 182-day and 6 bps for 364-day papers.The 10-year benchmark G-sec closed the week at 7.00%.

The bond market opened on a steady note in the fourth week, amid lower crude oil prices, and as participants awaited India’s gross domestic product (GDP) data for the fourth quarter of fiscal 2024 (May 31) and the outcome of general elections (June 4). On May 31, 2024, the RBI cancelled the auction of 10-year green bonds since traders refused to pay a premium for the impact these bonds would have on sustainability. Yield on the 10-year benchmark G-sec closed the week at 6.99%.

In its second bi-monthly meet for this fiscal, the RBI’s Monetary Policy Committee (MPC) kept the policy rate unchanged at 6.50%. MPC members voted majority to maintain status quo. The committee noted economic activity remains resilient, supported by domestic demand. It revised the real GDP growth projections for this fiscal to 7.2% from 7.0% earlier. The central bank retained the fiscal’s inflation forecast at 4.5%.