India's Bond Market Cautious as Global Inflation, Policy Risks Loom

India's fixed income market faces a cautious near term with high bond yields, driven by global inflation from rising oil prices and domestic policy uncertainty, according to a Union Bank of India report. The RBI maintains a hawkish stance.

India's fixed income market is expected to remain cautious in the near term, according to a report by Union Bank of India. Bond yields are likely to stay high due to global inflation risks and uncertainty around domestic policies. 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.

Global Pressures and Inflation Concerns

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.

Domestic Policy and RBI's Stance

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.

Indian Bond Market Performance

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.

Regulatory and Liquidity Measures

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)

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