India's Bond Yields Stay High Amid Global Inflation, RBI Hawkish Stance

The report says market sentiment is cautious, and any short-term gains are likely to be driven by technical factors rather than real improvement in fundamentals.

"Overall, the market bias remains cautious, with yields likely to stay elevated amid inflation risks and policy uncertainty," the report said.

Globally, markets are under pressure due to rising geopolitical tensions, especially in the Middle East. This has pushed crude oil prices above $100 per barrel, increasing inflation concerns worldwide. As a result, bond yields in major economies have risen, with US 10-year yields around 4.45-4.55% and Japan's near multi-decade highs. This trend is also putting pressure on emerging markets like India.

"The surge in oil prices has reinforced global inflation concerns, shifting market dynamics away from traditional safe-haven flows toward inflation-driven bond repricing." the report noted.

In India, the RBI has kept the repo rate unchanged at 5.25% but maintained a hawkish stance, indicating that inflation remains a concern. Inflation forecasts have been slightly raised due to high oil prices and imported inflation, reducing the chances of rate cuts in the near future.

The RBI has also shifted focus to managing liquidity more actively. It plans to absorb excess liquidity through tools like Variable Rate Reverse Repo (VRRR) auctions. The central bank continues its policy of "withdrawal of accommodation" to keep short-term rates aligned and avoid easing financial conditions too soon.

India's 10-year government bond yield has risen to around 7.14%, reflecting global and domestic pressures. However, a recent bond auction saw strong demand, leading to a temporary drop in yields due to improved sentiment and short-covering.

On the regulatory side, the RBI has removed the requirement for banks to maintain an Investment Fluctuation Reserve (IFR). This allows banks to reclassify these funds as core capital, strengthening their financial position.

Currently, liquidity in the banking system remains high, mainly due to government spending. However, the RBI is expected to gradually reduce this surplus through liquidity absorption measures.

- ANI