Bond yields are falling, RBI rate cut likely: What should investors do now?
The Reserve Bank of India (RBI) is set to announce its monetary policy this week, and the markets are buzzing with expectations of a further rate cut. If the central bank lowers the repo rate, it could affect a range of asset classes. Home loan borrowers might enjoy lower EMIs, equity markets may rally on the back of cheaper borrowing, and most notably, bond markets could see a significant movement in yields and prices.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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A rate cut typically affects the bond market the most because interest rate changes have a direct impact on bond prices and yields since the two move in opposite directions. When interest rates fall, bond prices go up, and when the rates rise, bond prices drop.
This happens because newly issued bonds reflect the current rates. So, older bonds with higher interest coupons become more attractive when rates fall, which increases their prices. The reverse happens when rates go up; newer bonds offer better returns, making older ones less appealing, lowering their prices.
Here’s a simple example. Suppose you own a bond with a face value of Rs.1,000 and an annual coupon of Rs.80, giving you an 8% yield. If new bonds are being issued with a 6% yield, investors will be willing to pay more for your higher yielding bond, pushing its price above Rs.1,000. If interest rates rise and new bonds offer 10%, your 8% bond becomes less attractive, causing its price to fall below Rs.1,000.
FALLING TREND LIKELY TO CONTINUE
Bond yields have been falling for some time and this trend could continue when the RBI announces a rate cut on 9 April. “Markets expect a 25 basis point rate cut in the RBI’s policy meeting,” says Harsimran Sahni, EVP & Head, Treasury, Anand Rathi Global Finance. “The bond market has already priced in this cut,” he adds.a:hover{text-decoration:none;} .liveEventMain_widget{margin-top:15px;padding-top:24px;border-top:2px solid #000;position:relative;font-family:Montserrat;} .liveEvent_slider{position:relative;overflow:hidden;} .liveEvent_slider ul{white-space:nowrap;list-style:none;margin-top:12px;} .liveEvent_slider ul.sliderContainer{margin-bottom:30px;} .liveEvent_slider ul li{white-space:normal;width:282px;vertical-align:top;display:inline-block;margin-right:12px;border-radius:12px;box-shadow: 0px 4px 12px 0px #2407461F;background-color:#fff;overflow: hidden;} .images_wrap{position:relative;} .images_wrap .cover_img{object-fit:cover;object-position:center;border-top-left-radius:4px;border-top-right-radius:4px;} .images_wrap .author_img{position:absolute;left:10px;top:13px;border-radius:10px;} .images_wrap::before{background-image: linear-gradient(180deg, rgba(11, 11, 46, 0) 20.31%, rgba(11, 11, 46, .6) 61.46%, #0b0b2e);content: "";height: 100%;left: 0;position: absolute;right: 0;width: 100%;} .liveEventMain_widget .details{padding:12px;} .liveEventMain_widget .category{font-size:12px;line-height:14px;font-weight:700;color:#6a11b0;margin-bottom:8px;} .liveEventMain_widget .course_name{font-size:16px;line-height:20px;font-family:Faustina;-webkit-line-clamp:2;overflow:hidden;height:40px;display:-webkit-box;-webkit-box-orient:vertical;font-weight:600;color:#000;} .liveEventMain_widget .details .author_name{font-size:13px;line-height:16px;color:#333;font-weight:400;margin-top:4px;-webkit-line-clamp:2;overflow:hidden;height:32px;display:-webkit-box;-webkit-box-orient:vertical;} .liveEventMain_widget .view{border: 1.5px solid #D51131; display: block; padding: 8px 0; text-align: center; border-radius: 4px; font-size: 14px; line-height: 16px; color: #D51131; margin-top: 12px; width: 100%; font-family: Montserrat; font-weight: 600; cursor: pointer;} .liveEventMain_widget .view span{display: inline-block; width: 6px; height: 6px; border-top: 1.5px solid #ed193b; border-left: 1.5px solid #ed193b; transform: rotate(90deg); position: relative; left: 5px; top: -2px;} .liveEventMain_widget .view span::after{content: ''; display: inline-block; width: 11px; border-top: 1.5px solid #ed193b; transform: rotate(45deg); position: absolute; top: 3px; left: -2px;} .liveEventMain_widget .arrow_btn{width: 26px; height: 25px; position: absolute; z-index: 11; background-size: 312px; cursor: pointer;} .liveEventMain_widget .nextprev-btn{display:inline-block;width: 100%; position: absolute; top: 59%;} .liveEventMain_widget .prev-btn{background-position: -212px -2px;left: -12px;} .liveEventMain_widget .next-btn{background-position: -241px -2px; right: -3px;left:unset;} .liveEventMain_widget .arrow_btn.disable{opacity:0.5;} .liveEventMain_widget .ts-dots{display:inline-block;position:absolute;top:34px;right:10px;} .liveEventMain_widget .ts-dots ul{display:inline-block;} .liveEventMain_widget .ts-dots li{width:7px;height:7px;border-radius:50%;background-color:#cdcdcd;margin:0 2px;display:inline-block;} .liveEventMain_widget .ts-dots li span{display:none;} .liveEventMain_widget .ts-dots li.active{background-color:#ed193b;} .liveEventMain_widget .topContain { display: flex; align-items: center; gap: 6px; } .liveEventMain_widget .topContain .imgBox { max-width: 40px; } .liveEventMain_widget .topContain .logoTitle { font-family: "Montserrat", "Verdana"; font-weight: 700; font-size: 20px; line-height: 100%; } .liveEventMain_widget .topContain .logoSubTitle{ position: relative; font-size: 18px; font-weight: 500; line-height: 1.2; color: #747474; margin-left: 24px; } .liveEventMain_widget .topContain .logoSubTitle:before{ content:''; position: absolute; left: -13px; top: 0; width: 1px; height: 100%; background-color: #838383; } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer{ } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer .liveEventCard{ display: flex; } .liveEventMain_widget .liveEvent_slider .liveEventCardContainer .liveEventCoverImg{ }
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This movement is part of a broader shift. Since the beginning of 2024-25, the 10-year government bond yield has fallen by 47 basis points, which is the steepest drop in five years. Experts expect it to settle between 6.25% and 6.3% in 2025-26.OTHER FACTORS PUSHING YIELDS LOWER
However, falling interest rates aren’t the only reason that the yields are down. “Another reason is the global macro uncertainty and lower growth outlook domestically. With the latest announcement of tariffs by the US, we anticipate India’s growth outlook to remain unpredictable,” says Vishal Goenka, Cofounder, Indiabonds.com.Besides, the government has announced Rs.8 lakh crore of borrowing in the first half of 2025-26, which was in line with the market expectations. Since there were no surprises, market sentiments remained stable and bond yields continued to ease.
There’s also a strong demand for bonds, especially from banks and institutional investors, which is pushing the prices up and the yields down. Due to the improved liquidity conditions in the system, banks have more room to invest in bonds now.
LIQUIDITY MEASURES SUPPORTING BOND MARKET
Better liquidity is another key driver. The RBI recently announced open market operations (OMOs) worth Rs.2.6 lakh crore, including Rs.80,000 crore in April alone. “Driven by these measures by the RBI, system liquidity has turned surplus after more than three months,” says Sahni. This additional liquidity has increased the demand for bonds, boosting prices and lowering yields.Sahni also expects a further liquidity boost through a cut in the cash reserve ratio (CRR). “There is an expectation of a 25 bps CRR cut in the market, which would infuse about Rs.56,000 crore into the banking system,” he adds. So, the market participants are not just waiting for a rate cut, but are also closely watching the RBI’s stance on liquidity.
WHAT SHOULD INVESTORS DO NOW?
“Given the uncertain outlook for equities and the fact that there is more room for rate cuts, bond holders should be adding more fixed-income assets to their portfolios,” says Goenka. Not only does this help with diversification, but it also creates room for capital gains if the rates fall further.He suggests adding long-dated government securities and AAA-rated bonds in the 7-10-year range, as they are safe and respond well to falling rates. At the same time, investors can consider high-yield corporate bonds with 2-3-year maturities as corporate yields haven’t declined yet, making this a good time to enter. Sahni agrees that short-term bonds may give better returns. “We expect the shorter end of the curve to perform better, with bull steepening in the medium term. This means shorter maturity bonds could deliver better risk-adjusted returns in the months ahead,” he says. A balanced approach, with a mix of durations and credit quality, could help investors manage risk and optimise returns.
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This story originally appeared on: India Times - Author:Faqs of Insurances
