Indian government bond yields traded flat on Tuesday, August 4, as investors remained on the sidelines ahead of the Reserve Bank of India’s (RBI) monetary policy decision, while a large state bond auction kept market participants cautious.
The benchmark 6.94% 2036 government bond yield was little changed at 6.8346%. According to a Reuters report, Indian states are scheduled to raise ₹268.5 billion through bond sales later in the day, with the auction expected to provide cues on investor appetite for debt.
The RBI’s Monetary Policy Committee (MPC), which began its three-day meeting on August 3, is set to announce its policy decision on August 5. Economists and market experts widely expect the central bank to keep the repo rate unchanged at 5.25% . At its June review, the RBI had left the standing deposit facility (SDF) rate at 5%, while the marginal standing facility (MSF) rate and bank rate were retained at 5.5%.
Crude oil, foreign flows remain key market drivers
According to Reuters, inflation and growth uncertainties have moderated since the last policy review. Citing an IDFC Bank note, the report said headline inflation for FY27 is tracking below the RBI’s projections, while risks to the central bank’s 6.6% GDP growth forecast appear tilted to the upside.
However, global factors continue to influence the bond market. Although crude oil prices fell nearly 7% in the previous session, Brent crude edged higher to around $84.8 per barrel in Asian trade, keeping investors cautious amid the ongoing US-Iran conflict. Higher oil prices and elevated US Treasury yields have weighed on Indian bonds in recent weeks by reducing the attractiveness of emerging-market debt.
Foreign portfolio investors (FPIs), who were strong buyers over the past two months, turned net sellers towards the end of July and offloaded more than ₹34 billion worth of Indian bonds last week, according to the Reuters report. The report added that inflows under the RBI’s foreign currency deposit scheme for non-resident Indians (NRIs) have offered some support, attracting $36.7 billion so far.
Outlook for bond yields
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Investments Ltd, expects the RBI to maintain the status quo on interest rates in its 5 August monetary policy review. He said that, in the absence of any policy change, bond yields are unlikely to witness significant movement, with the 10-year government bond yield likely to trade in the 6.8%-6.9% range. According to Vijayakumar, the RBI Governor’s commentary on the inflation outlook and the central bank’s future policy stance will be the key factors influencing yield movements.
Sunny Agrawal, Head of Fundamental Research at SBI Securities, said the market is largely pricing in no change in policy rates at the upcoming RBI meeting. He noted that the direction of bond yields will depend on RBI Governor Sanjay Malhotra’s commentary, particularly on inflation.
Agrawal said a hawkish tone could push bond yields higher as markets reassess the interest rate outlook. However, if the Governor adopts a balanced stance, acknowledging inflation risks while expressing confidence in the overall outlook, bond yields are likely to remain stable, with no significant adverse reaction following the policy announcement.
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