RBI Rate Call Keeps Bond Market in a State of Uncertainty Amid 10-Year Yield Plateau Near 7%

Indian Government Bonds Expected to Open Week on Quiet Note Ahead of Central Bank's Monetary Policy Decision

The Indian government bond market is likely to open the week on a quiet note, as focus shifts to the Reserve Bank of India's (RBI) monetary policy decision on June 5. The central bank's decision will have a significant impact on the market, with economists expecting the repo rate to remain unchanged. According to a private bank trader, the yield on the benchmark 6.48% 2035 note is expected to trade in the 6.97% to 7.02% range, a decline from its previous close of 7.0037% on Friday.

The RBI's monetary policy decision will be closely watched by investors, with nearly 80% of economists in the May 22-29 Reuters poll expecting the repo rate to remain unchanged. However, a minority of economists, including Standard Chartered, Capital Economics, ANZ, MUFG, and OCBC, are calling for an interest rate increase.

Monetary Policy Decision to Influence Market Expectations

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The RBI's decision will also impact the market's expectations, with investors watching closely for any changes in the central bank's inflation and growth forecasts for the fiscal year ending March 2027. The war in the Middle East has had a spillover impact on the global economy, and the RBI is expected to update its forecasts accordingly.

The Indian government bond market has been under selling pressure due to a spike in crude oil prices and a weakening local currency. The Strait of Hormuz, which handles about a fifth of global oil and liquefied natural gas flows, has remained largely shut since February 28, pushing up benchmark Brent crude price by over 30%. Elevated oil prices have impacted India's inflation and current account deficit, adding pressure on the central bank to hike interest rates.