Demand For Long-Term Bonds To Remain Firm As RBI's Rate Cut Cycle Nears End

Bond yields have fallen across tenures and segments over the past week on increased hopes of a cut in the repo rate by the Reserve bank of India’s (RBI) Monetary Policy Committee (MPC) next month. However, with most market participants expecting that the rate easing cycle is nearing its end, some are switching to longer tenure bonds to capture a higher price gain, they said.

RBI Governor Sanjay Malhotra earlier in the week said that room for rate cuts was not limited after the recent macroeconomic data, bond yields across the curve fell. The said macroeconomic data in question was the print of 0.25 per cent Consumer Price Index (CPI) inflation for the month of October. A lower inflationary situation opens up scope of a rate cut. The MPC panel’s decision on the benchmark repo rate, which is currently set at 5.50 per cent, hinges on balancing growth and inflation in the country. An interest rate cut provides monetary stimulus to the economy, thereby bringing down rates of loans as well as deposits.

India’s GDP growth data for September quarter, which many traders expect to be crucial decision maker for the MPC in the coming week, was at 8.2 per cent, against wide estimates of around 7.0-7.5 per cent. The RBI had forecasted the GDP growth data for the quarter to be around 7.0 per cent. A GDP growth rate above 8.0 per cent could likely reduce chances of a rate cut in December, market participants said.

“RBI has given some support to the (G-sec) market, earlier by buying bonds through Open Market Operations (OMOs), and then with Malhotra’s comments,” a trader at a private sector bank said. OMOs are a tool used by the RBI to inject to suck out rupee liquidity from the banking system. The RBI bought over Rs. 14,800 crore of bonds in the secondary market, according to RBI data, thus reducing the overall outstanding market supply of those bonds and injecting liquidity in the system. This in turn raising demand for bonds.

 “I personally would like to go for bonds (maturing in) up to five years, because even if things go haywire, I don’t  see a sharp rise in yields” the trader said. “But if someone wants to go for the price gain, long-term bonds of 15 years and above is giving you attractive yields.”

The yield differential on the 15-year benchmark gilt over the 10-year benchmark gilt is currently over 35 basis points, seen as an attractive entry point for investors, since a rate cut usually triggers a sharper fall in yields of longer tenure bonds compared to its shorter tenure peers.

However,  institutional investors are worried that a higher supply of state government bonds in the fourth quarter of FY26 could limit the demand for long-term gilts, as state bonds offer a higher yield compared to gilts, market participants said. Supply of state bonds is expected to be between RS. 3-4.5 lakh crore during the March quarter, they said.

Meanwhile, for corporate bonds, issuances in medium to long-term of up to 15 years have seen a rise. Financial companies are rushing to fund through long-term bonds as they expect the repo rate to bottom out around 5.00-5.25 per cent, from 5.50 per cent currently. Issuers are coming to borrow through 10-15 year papers to secure funds before interest rate stabilises, and as the fiscal year is nearing its end, market participants said.

ICICI Prudential raised Rs. 865 crores at 7.69 per cent, maturing in 10 years in 2035. Similarly, ICICI Bank raised Rs. 3,945 crores in tier II bond issuance also saw the coupon being set at 7.40 per cent for a 15-year paper. Indian Railway Finance Company accepted Rs. 2,981 crore at 6.80 per cent for 10 years.

“Corporate bonds are giving you good yields, and since we have seen issuance in the segment has not been much in the past couple of months, investors are lapping up whatever they get and at lower yields,” a dealer at a mutual fund house said. “We should see corporate bond issuances rise and because of regulatory requirement of companies and pension funds, demand should be firm.”

The shift toward longer-term bonds was the change in regulatory compliance and investment plans for insurance companies and pension fund houses, which are likely to remain firm till end of March, market participants said.

How can retail investors participate?

Retail participation in bonds have increased nearly four times in the past six months. The monthly trade volume on the request for quotation (RFQ) platform has surged to nearly 1.55 lakhs in October, which signals increased participation from retail investors and high-net-worth individuals. More retail investors have increased their exposure to bonds, especially given the volatility and uncertainty in equity markets and on the global economic front. Retail bond distribution stands at around Rs. 1,500 crore a month, up from just Rs. 500 crore a year ago, according to industry estimates.

There are several platforms on which retail investors can invest in bonds.

1. Through Sebi registered online bond platforms

2. Through RBI’s retail direct portal

3. Through stock exchanges and brokers

4. Through mutual funds which invest in bond indices

For directly investing in a bond through either online bond platforms or stock exchanges, the investor needs a Demat account. Investors can find bonds listed in the stock exchanges and purchase these bonds. Investors do not need a Demat account in order to trade in gilts and other short term debt instruments of governments through the RBI’s retail portal.