RBI’s bond buyback, economic growth push yields higher amid rate cut hopes

Yields of the 10-year benchmark climbed four basis points higher at 6.29%, as traders increased bets on a shallower rate easing cycle after Friday’s data showed the economy expanded 6.5% for FY25.

Many traders now believe the terminal policy rates would be higher – at 5.50%-5.75%.

Soon after trading ended, the Reserve Bank of India (RBI) also announced Rs 25, 000 crore of bond buybacks – a measure aimed at infusing durable liquidity in the system.

A section of money market traders had factored a terminal policy rate of 5% – 5.25% on expectation that GDP would grow at 6.3%. The repo rate, currently at 6%, is widely expected to be reduced by another 25 basis points to 5.75% in the monetary policy announcement on June 6.

Yields of the 10 year bond traded in a five basis point range of 6.24% to 6.29%, with a sharp rise seen in the last half hour of the trade, CCIL data showed. The yield had closed at 6.25% on Thursday.

“There was a section of the market who anticipated terminal rates at 5% to 5.25%, but with the latest GDP data, the cumulative cut expectations by the RBI has come down. Hence some bonds got sold off, taking yields higher towards the end,” said a senior bond trader at a primary dealership.Traders expect yields to ease next week though, in the run up to the RBI’s monetary policy announcement on June 6. The RBI is expected to cut rates by 25 basis points for the third consecutive time. Additionally, the RBI also announced buyback of government bonds worth Rs 25,000 crores on June 5, with an aim to infuse liquidity, and also take down the redemption cost for FY 27. All the bonds that RBI will buy back on June 5 will mature in FY 27.