RBI’s upcoming monetary policy stance, FIIs, crude, global central bank action among key factors to influence bond yield

Domestic bond yields have been strengthening for some time. Firstly, a higher-than-expected borrowing plan by the state governments in the last quarter of FY2024 moved the yields higher. Also, the anticipation that the US Federal Reserve would not aggressively resort to rate cuts in 2024 worsened the sentiment.

Nevertheless, the trend reversed as optimism set in the bond market amid the proposal of the inclusion of domestic bonds in the Bloomberg Emerging Market Local Currency index. This aided market sentiment and the yield on the 10-year G-securities remained steady at 7.18 per cent, the same as that of December 29, 2023.

Interestingly, JP Morgan’s proposal to include domestic bonds in its emerging markets bond index was a notable milestone in the country’s economic journey. With this, India positions itself as an attractive destination for global investors.

How are US bond yields faring?

As per ICRA Analytics debt fortnightly wrap, the 10-year yield benchmark rose as markets re-evaluated the Fed's likely course of action on interest rates. Data suggested that the U.S. labour market remained strong, which tempered expectations of aggressive rate cuts by the U.S. Federal Reserve, noted the report. Last, the US 10-year bond yield traded 0.66 per cent higher at 3.978.

Outlook on bond yield

Rating agency ICRA is of the view that in the run-up to the 2024 Parliamentary elections, there will be heightened volatility in the debt market. Further, movement in the debt market shall be influenced by the RBI’s interest rate in the upcoming monetary policy review. Largely, there are expectations that, amid inflation woes, the apex bank will not be in a hurry to reduce interest rates.
Additionally, global central banks’ policy action, crude prices, FII transactions, and the movement of the rupee against the greenback will decide the bond yield trajectory going further.