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Stronger-than-expected economic growth has led to hardening of bond yields, leaving the market divided over the Reserve Bank of India's upcoming monetary policy decision, a report by Union Bank of India stated.
According to the report, global fixed income markets remained modestly higher during the week as investors balanced growth resilience with ongoing central bank policy normalization. In the domestic market, India's 10-year Government Security yield rose to 6.49 per cent, driven by robust Q2 FY26 GDP growth of 8.2 per cent year-on-year, which reduced expectations of a possible repo rate cut on December 5. The report stated "the stronger than expected GDP print, traders cut the probability of a December move, signalling that the data meaningfully tempered dovish expectations". The report noted that fiscal dynamics, including front-loaded capex and a manageable revenue shortfall, helped support market stability. Banking system liquidity remained comfortable with a monthly average surplus of Rs 1.78 lakh crore, supported by the recent CRR cuts, government disbursements, and capital expenditure flows. However, the surplus may narrow slightly in early December due to corporate advance tax outflows. The report mentioned a divided view in the market, but expressed its call in favour of a rate cut, noting that the December 3-5 MPC meeting could provide further clarity on durable liquidity measures, including Open Market Operations (OMOs) estimated at Rs 1-2 lakh crore. Globally, the US 10-year Treasury yield edged up to 4.02 per cent, as softer labour data earlier in the week was countered by sticky inflation reflected in core PCE at 2.6% YoY and strong GDP projections. In Japan, the 10-year JGB yield increased to 1.81 per cent, driven by expectations of higher bond issuance linked to the 21 trillion Japanese Yen fiscal stimulus, the Bank of Japan's guidance on gradual rate hikes, and tapering of bond purchases. The report highlighted that ahead of the GDP release, the market was almost fully pricing in a 25-basis-point repo rate cut in the December 5 policy. This expectation reflected in the benchmark 6.48 per cent 2035 bond, which had eased around 5 basis points between last Friday and Thursday after RBI Governor Sanjay Malhotra reiterated earlier that recent data provided scope for monetary easing. However, the stronger-than-expected GDP print altered market sentiment, leading traders to reduce the probability of a December policy move, signalling that the economic data meaningfully tempered expectations of a dovish stance. The report concluded that growth surprises have shifted market dynamics and the tone of RBI's upcoming policy will play a crucial role in shaping bond market direction and liquidity expectations. The (monetary policy committee) MPC meeting is underway from December 3-5, and the final policy decision will be announced on December 5 (Friday) by RBI Governor Sanjay Malhotra at 10 AM. (ANI)
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