Jumpy July

The yield on the 10-year benchmark government security (G-sec; 7.10% GS 2034) opened July at 7.01% and closed at 6.92%, down 8 basis points (bps) from the previous month’s close of 7.01% and below CRISIL’s forecast range of 6.95-7.05%.

The first week opened with a negative bias due to a rise in US treasury yields. Trading volumes in the bond markets remained thin as traders avoided placing aggressive bets amid lack of firm domestic and offshore cues. The fall in US treasury yields ahead of US non-farm payroll and unemployment data release supported domestic bonds to some extent. Better-than-expected weekly auction results for G-secs had a positive impact on the market. The 10-year benchmark G-sec yield opened the week at 7.01% and closed at 6.99%.

In the second week, the domestic Consumer Price Index (CPI) for June printed at 5.08%, higher than the previous month’s reading of 4.75%. The US CPI softened to a lower-than-expected 3.0% in June 2024 from 3.3% in May 2024. The Reserve Bank of India (RBI) continued to conduct multiple variable rate reverse repo (VRRR) auctions throughout the week to absorb surplus liquidity due to G-sec maturities. Following this, the 10-year benchmark G-sec yield closed the week at 6.99%.

The third week opened with a negative bias tracking higher-than-expected domestic CPI data for June 2024. Foreign investments in government bonds climbed more than $1 billion since domestic sovereign debt was included in the JP Morgan Index, adding to the $11 billion yield-influencing inflows since the inclusion was announced in September 2023. The RBI continued to conduct multiple VRRR auctions throughout the week due to surplus liquidity in the system. The 10-year benchmark G-sec yield closed the week at 6.96%.

The fourth week opened with a negative bias tracking an overnight rise in US treasury yields. Further, the RBI’s open market operation (OMO) sales of Rs 0.03 lakh crore during the week ended July 12 weighed on yields. The downward revision in fiscal deficit to 4.9% in fiscal 2025 from 5.1% earlier, as per the Union Budget announcement, provided some comfort; however, a lower-than-expected borrowing cut disappointed market participants. Yields on short-term bonds witnessed some softening tracking the revision in the latest draft guidelines on the Basel III framework on the liquidity coverage ratio (LCR). This resulted in the 10-year benchmark G-sec yield closing at 6.92% in July.

In its third bi-monthly meet for this fiscal, the RBI’s Monetary Policy Committee (MPC) kept the policy rate unchanged at 6.50% as a majority of its members voted to maintain status quo. The MPC’s focus remains on aligning inflation to the target range.