Indian bonds slide on muddled policy bets; benchmarking liquidity expectations

Indian government bonds ended largely unchanged on Thursday as uncertainty over the fate of the key repo rate discouraged traders the next day, even as the benchmark bond rose, with traders hoping for a liquidity injection from the central bank.Ten-year bond yields ended at 6.5267% after closing at 6.5369% on Wednesday. Bond yields rise when prices fall.

The market is divided on the chances of a rate cut following the Reserve Bank of India’s policy decision, due on Friday, and is now seeing a wider range of possible outcomes, including steps to add liquidity to the banking system.
“The decision will be driven by the weight the MPC gives to below-target inflation, which leaves a significant real interest rate cushion, or to the solid growth report,” said Radhika Rao, executive director and senior economist at DBS Bank.

“Our basic view is modest cuts due to an evolving inflation trajectory for FY26. Announcements on potential open market operations may be made outside the interest rate decision timeline.”

Investors were restless, with strong growth figures and a weakening rupee testing investor conviction. India’s economy grew 8.2% in the July-September quarter, beating expectations, while retail inflation eased to a record low 0.25% in October, with the difference raising questions about the fate of the rate cut, analysts said. Meanwhile, the market will also focus on the supply of new debt. New Delhi plans to sell 320 billion rupees ($3.56 billion) of the 10-year 6.48% 2035 bond – which will replace the existing benchmark in the coming days – following the policy decision.PRICES

Indian overnight rates (OIS) ended flat, with the one-year swap rate almost pricing out the possibility of a rate cut.

The one-year OIS ended at 5.4775% and the two-year swap ended at 5.52%. The five-year OIS interest rate was 5.82%. ($1 = 89.9710 Indian Rupees)