India's 10-year bond yield likely to soften, to trade between 6.25%-6.35% in July: BoB Report

The report highlighted that several domestic and global factors are influencing the movement of yields.

It stated "we expect India's 10Y yield to trade with a softening bias in the range of 6.25-6.35 per cent in the current month".

Globally, yields have been affected by increased risk aversion due to the geopolitical tensions in the Middle East. As a result, yields in major advanced economies (AEs), including the US and UK, are also moving with a softening trend.

In the US, weak macroeconomic indicators, especially a cooling labour market, have raised hopes of a more relaxed monetary policy in the near term.

In India, however, the 10-year bond yield has shown a marginal upward bias, despite a dovish monetary policy stance by the Reserve Bank of India (RBI).

The report suggested that market expectations might have already priced in the frontloaded rate hikes by the RBI, as reflected in the Overnight Indexed Swap (OIS) rates.

Another factor contributing to the stiffening of yields in India is the higher outflows from Foreign Portfolio Investors (FPIs), especially through the Voluntary Retention Route (VRR) and Fully Accessible Route (FAR).

These outflows are partly due to a narrower interest rate differential between India and the US.

The report also observed a steepening bias in the yield curve, with the longer-end of the curve (13 years and above) witnessing upward momentum.

However, the report noted that some correction is likely going forward. The long-term yields are expected to remain stable due to supportive global and domestic macroeconomic conditions, such as falling inflation and favorable liquidity.

On the liquidity front, RBI's announcement of Variable Rate Reverse Repo (VRRR) operations signals a move toward normalization, aiming for a 1 per cent Net Demand and Time Liabilities (NDTL) surplus.

The recent extension of call money market hours has also been described as a positive step to enhance market liquidity and help align the operating target more closely with the repo rate.

Due to the above reasons, the report expects India's 10-year bond yield to trade with a softening bias in the 6.25-6.35 per cent range in July, supported by easing inflation, better liquidity, and global market cues. (ANI)