The Indian bond market had its biggest boost in 4 months after the RBI (Reserve Bank of India) announced some new guidelines to help banks. These guidelines include buying government bonds and an FX (Foreign Exchange) switch. The goal of these new rules is to stabilise borrowing costs and support economic growth during ongoing global trade challenges.
Now, the bond yields have decreased, with the 10-year yield decreasing by 8 basis points to 6.56%. This is the largest drop since August and shows that investors are adjusting their expectations based on current economic conditions and monetary policy. On Tuesday, after the market closed, the RBI announced that it will purchase 2 trillion rupees ($22 billion) of government bonds in 4 parts over December and January. In addition, the central bank has also planned a $10 billion FX switch in the next month.
According to the analyst's view, these measures are a “shock-and-awe” boost to market sentiment. Industry insiders, including Dhawal Dalal, chief investment officer for fixed income at Edelweiss Asset Management Ltd, say the large-scale bond purchases could push the 10-year yield toward 6.50%. Traders at institutions such as RBL Bank Ltd. and ICICI Securities Primary Dealership Ltd. also said, highlighting the view that the liquidity infusion could help stabilise yields.
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The RBI has decided to double the amount of money it is putting into the economy, compared to what was announced earlier this month. The plan aims to reduce the cash loss from the RBI’s dollar sales to support the rupee, which is currently the worst-performing currency in Asia this year. The new rules have been introduced after the benchmark yield recently increased to a nine-month high earlier this week.
This policy push aligns with the RBI’s ongoing effort to keep borrowing costs steady & protect economic growth from external shocks, including disciplinary US tariffs. Overnight borrowing costs for lenders increased significantly this week because there was less money available. This was caused by tax payments and the RBI’s efforts to support the rupee by buying dollars.
According to the data of Bloomberg Economics, the liquidity dynamics remained weak, with banking-system liquidity slipping into a deficit of 727 billion rupees on December 22, down from a surplus of 2.6 trillion rupees earlier in the month. The rally in Indian bonds followed a period of market strain driven by concerns over potential increases in state debt supply. Supporting the gains was fresh data released after Tuesday’s trading session, showing that a category of market participants, including the RBI itself, bought 47.4 billion rupees of notes, the most since November 11.
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