India 10-year bond yield sees biggest drop in half a decade on foreign flows, rate cut

Indian government bond yields plunged this financial year, with the benchmark bond yield posting its steepest drop in five, as humongous foreign inflows and the dovish tilt from global central banks fuelled investor appetite for local debt.

The 10-year benchmark bond yield ended at 6.5823% on Friday, the last working day of the financial year.

The 10-year yield slid 15 basis points in March, the most in 10 months. That took its plunge this fiscal year to 47 bps, more than last fiscal's 26 bps drop and the steepest since the year ended March 2020.

"Longer-duration bond yields could see a further fall going ahead and look lucrative," said Avnish Jain, Canara Robeco Mutual Fund's head of fixed income.

The second quarter was the best for yields due to the surge in foreign inflows as Indian bonds were included in JPMorgan's emerging market debt index.

Overall, foreigners' purchases hit a record high of 1.27 trillion rupees ($14.86 billion) this fiscal, per clearing house data.

Demand also got a fillip as the U.S. central bank started its rate easing cycle, including slashing rates by 100 bps towards the end of 2024.

The Reserve Bank of India followed suit in February with its first rate cut in five years after changing its monetary policy stance to "neutral" in late 2024.

Bond investors also feasted on the RBI's aggressive liquidity infusion in the last four months.

The RBI slashed its cash reserve ratio in December and followed it up with bond purchases and forex swaps in January-March, infusing an aggregate of 6.2 trillion rupees along the way.

Separately, the RBI also conducted early-April maturity repos and daily repos to keep a tab on overnight rates.

FY26 OUTLOOK
Yields are anticipated to ease next financial year as the RBI is expected to continue its liquidity infusion and deliver more rate cuts than anticipated.

The next policy decision is on April 9, when the RBI could also tweak its liquidity management framework by reverting to providing daily funds to banks.

The lower-than-expected debt supply for April-September will aid demand for bonds and, along with easing liquidity, will further steepen the yield curve. ($1 = 85.4570 Indian rupees)