India’s 10-Year Bond Yield Faces Further Downside if RBI Cuts Policy Rate Beyond 25 bps

India’s benchmark 10-year government bond yield may witness a sharper decline if the Reserve Bank of India (RBI) surprises the market with a policy rate cut exceeding the widely anticipated 25 basis points, according to a June forecast by Bank of Baroda. The report highlighted that bond yields are likely to trade in the 6.15%–6.27% range during the month, with downside risks becoming more prominent should the RBI adopt a more aggressive easing stance during its upcoming Monetary Policy Committee (MPC) meeting scheduled for June 6.

Highlights:

• A rate cut above 25 bps could accelerate bond yield decline.

• Expected yield range for June: 6.15%–6.27%, with risks skewed lower.

• MPC meeting outcome on June 6 will be decisive for near-term bond trajectory.

Divergent Trends: Global Yields Harden, Indian Yields Soften

The report contrasted India’s bond market behavior with global developments in May 2025. While global yields hardened due to growing concerns over U.S. fiscal debt levels—causing a risk-off sentiment across developed markets—Indian government securities experienced broad-based softening across the yield curve. The decline was particularly steep at the short end, reflecting high sensitivity to liquidity conditions. This divergence has led to a steeper yield curve in India, a trend the Bank of Baroda expects to continue in the near term.

Highlights:

• Global yields rose in May amid U.S. debt concerns and risk aversion.

• Indian yields declined, especially on the short end of the curve.

• Yield curve steepening is expected to persist.

RBI’s Liquidity Management Supports Lower Yields

According to the report, the RBI’s proactive liquidity operations have played a key role in supporting the bond market. By maintaining a comfortable liquidity surplus—estimated at around 0.7% of Net Demand and Time Liabilities (NDTL) in May 2025—the RBI has ensured stability across maturities. The banking system, too, reflected this surplus, with incremental deposits outpacing borrowing requirements when adjusted for credit and investment flows. This has reinforced the downward pressure on yields across tenors.

Highlights:

• RBI managed a surplus liquidity position of 0.7% of NDTL in May.

• Bank funding gap narrowed as deposits exceeded credit and investment needs.

• Liquidity comfort has underpinned broad-based yield compression.

Seasonal Liquidity Pressures Offset by RBI Dividend and OMOs

Looking ahead, the report anticipates moderate liquidity stress due to the seasonal build-up of government cash balances. However, the RBI’s recent large dividend transfer to the central government and its ongoing fine-tuning operations, including Open Market Operations (OMOs), are expected to act as buffers. The central bank’s upcoming rate decision will thus not only influence bond pricing but also signal its liquidity stance for the coming quarter.

Highlights:

• Seasonal factors may exert short-term liquidity pressure.

• RBI dividend transfer and OMOs expected to cushion the impact.

• Policy rate action on June 6 to shape medium-term yield expectations.