Why The Long End Doesn’t Always Follow Repo Rate Cuts

Repo Cuts Automatically Lower Long-term Yields is a Myth

While repo cuts influence short-term rates—like overnight call money and treasury bills—their impact on the 10-year G-Sec yield is far less predictable.

Why? Because the 10-year yield reflects more than just the policy rate. It is shaped by:

• Inflation expectations and risk premium

• Government borrowing program (expected trends in fiscal deficits)

• Global factors (US Treasury yields, oil prices, Emerging Market risk sentiment)

• Domestic technicals & Regulatory changes (Liquidity Coverage Ratio norms, insurer demand, RBI’s open market operations)

These structural drivers often overshadow repo signals, making the long end of the curve less sensitive to policy changes.

What History Tells Us

Across five easing cycles since 2008 (see table):

• Repo cuts ranged from 125–425 bps.

• The 10-year yield fell only modestly—by an average of ~9 bps—and even rose in two episodes.

• During tightening phases, long yields declined in 3 out of 5 periods, despite hikes of up to 375 bps.

The correlation between repo changes and 10-year movements is low at just ~0.28, with a negligible regression slope (~0.04 bps change in 10-year yield per 1 bps repo rate change).

With liquidity conditions evolving and credit growth showing signs of moderation, concerns around the effective transmission of monetary policy have intensified. An analysis of yield movements over the past year reveals that transmission has been pronounced at the shorter end of the curve, with effectiveness diminishing as maturities lengthen.

Policy Transmission Has Been Strongest At The Short End

Thus, a reduction in repo rates does not necessarily ensure similar movement on long-term bond yields. During easing cycles, the yield curve often steepens, with yields on short-term instruments rallying more than those at the long end. Also, the RBI exerts greater influence over shorter-term bonds compared to longer-term bonds. This is why bond markets are segmented by duration.

For debt investors, policy signals should be considered as one factor among many when devising duration strategies. An effective approach requires evaluating inflation expectations, RBI’s liquidity operations, borrowing schedules, trends in fiscal deficits, risk premiums, global yields, and other variables rather than just repo rate signals.

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