Topic 2: DEBT: REGULATORY SUPPORT
April 2025 was marked by falling bond yields, strong domestic support, and ample liquidity, even as foreign investors exited due to global yield movements and a narrowing India-US yield gap. India’s 10-year government bond yield fell sharply from around 6.6% at the start of April to about 6.33% by month-end, marking a drop of 23 basis points and reaching a three-year low. The decline was driven by RBI’s dovish policy, moderating inflation, strong liquidity support, stable government borrowing, favourable global trends, and foreign investor demand. The Reserve Bank of India cut its repo rate by 25 basis points and infused liquidity through open market operations, supporting lower yields and positive sentiment. Despite record foreign portfolio investor (FPI) outflows of $2.27 billion due to narrowing yield spreads with US bonds, local demand from banks and mutual funds remained robust, keeping borrowing costs low. Banking system liquidity shifted to surplus, averaging ₹1.4 lakh crore, further reinforcing bond market optimism. The yield curve steepened, with short- and medium-term yields falling more sharply than long-term yields. Steepening can affect government and corporate borrowing strategies. With higher supply of 10-year bonds and lower supply at the short end, investors may expect higher yields in the medium term, influencing portfolio allocations and borrowing costs. Comfortable liquidity conditions and strong demand for shorter-term bonds further reinforce expectations of stable or lower short-term rates, while increased 10-year supply puts upward pressure on longer-term yields. The Indian debt market is likely to extend its rally in May 2025, with lower yields, strong demand, and supportive central bank policy. With the easing of inflation, stable government borrowing, and global risk-off sentiment are tailwinds, though geopolitical risks remain.
