What will RBI decide and how will it impact bond yields?

Governments issue debt security to support government obligations and spending. These are considered low-risk because the governments back them. Government bonds can also be called sovereign debt.

 Government bonds can also be called sovereign debt

Introduction

Some bonds can also be traded in secondary markets. Investors who work with a broker or financial institutions can sell or buy bonds issued previously in this marketplace. There can be a risk of interest rate in fixed-rate bonds. It occurs when the interest rate increases and the investors have lower-paying bonds compared to the market. Only a few bonds are in tandem with inflation. 

Bond Uses

Government bonds help to fund deficits in the budget and raise capital for different things like spending on infrastructure. The central bank also issues them to control the money supply in a nation. Once the central bank issues the bonds, the economy sees an increase in the money supply because the sellers get funds to invest or spend in the market. Financial institutions use the money deposited in banks to provide loans to individuals and companies, which boosts economic activities. 

Just like any other investment, government bonds also have their share of pros and cons. A benefit is that government bonds provide a steady return on income. However, this income is lower than other products because the risk involved is very low. The bond market is highly liquid, and one can resell the bond easily on the secondary market. Mutual funds and ETFs also have an interest in government bonds. Bonds with fixed rates might lag during inflation or when there are increased interest rates. 

Also Read: An overview of sovereign green bonds

The Current Situation

We expect the government bond yields in India to open slightly lower due to New Delhi trimming the money it planned to borrow. However, the moves RBI (Reserve Bank of India) makes later on in the day would clear out things further. The 10-year government bond benchmark will have a 7.31%-7.36% band till the policy decision is announced at 0430 GMT. Thursday saw the yield end at 7.3405%. India reduced the borrowing (gross) to 14.21tr INR ($174.41 billion), which was 14.31tr INR for 2022/23. India is aiming to borrow 5.92tr INR for October-March, and it borrowed 8.92tr INR in the fiscal year's first half. The supplies from October to March would include 160bn INR green bonds. There will be an auction for the borrowing plan later during the day. 

New Delhi wants to raise INR 330bn through bond sales. It would include a paper of a 10-year benchmark. The impact could be marginal of reduced borrowing and would include green bonds. However, the market might react to the decision of the monetary policy. Many market participants expect the RBI to increase the key increase rates for the third consecutive time by 50 basis points. The central bank of India has raised 140 basis points since May to 5.40%. The move came after inflation was above the tolerance level for eight months. FTSE Russell, the global index provider, said they would retain India on the potential upgrade list. There has been a recent spike in the U.S.A yields, and the Indian bonds have not reacted much. Many people believe the inclusion announcement might take place soon. 

Also Read: Importance of bonds in your portfolio.

The demand was seen as weaker than expected at Friday's debt auction. The yield increased by 21 points in the previous month and was the highest since May. We expect the investors in India to return to government bonds of five years because the benchmark 10-year bond yield's spread might rise by 25-30 basis points. In August, the spread stood at 30 basis points before speeding up of the index inclusion talks. However, due to the delay, the yields have reduced, and investors might turn to 5-year bonds. 

Introduction

Some bonds can also be traded in secondary markets. Investors who work with a broker or financial institutions can sell or buy bonds issued previously in this marketplace. There can be a risk of interest rate in fixed-rate bonds. It occurs when the interest rate increases and the investors have lower-paying bonds compared to the market. Only a few bonds are in tandem with inflation. 

Bond Uses

Government bonds help to fund deficits in the budget and raise capital for different things like spending on infrastructure. The central bank also issues them to control the money supply in a nation. Once the central bank issues the bonds, the economy sees an increase in the money supply because the sellers get funds to invest or spend in the market. Financial institutions use the money deposited in banks to provide loans to individuals and companies, which boosts economic activities. 

Just like any other investment, government bonds also have their share of pros and cons. A benefit is that government bonds provide a steady return on income. However, this income is lower than other products because the risk involved is very low. The bond market is highly liquid, and one can resell the bond easily on the secondary market. Mutual funds and ETFs also have an interest in government bonds. Bonds with fixed rates might lag during inflation or when there are increased interest rates. 

Also Read: An overview of sovereign green bonds

The Current Situation

We expect the government bond yields in India to open slightly lower due to New Delhi trimming the money it planned to borrow. However, the moves RBI (Reserve Bank of India) makes later on in the day would clear out things further. The 10-year government bond benchmark will have a 7.31%-7.36% band till the policy decision is announced at 0430 GMT. Thursday saw the yield end at 7.3405%. India reduced the borrowing (gross) to 14.21tr INR ($174.41 billion), which was 14.31tr INR for 2022/23. India is aiming to borrow 5.92tr INR for October-March, and it borrowed 8.92tr INR in the fiscal year's first half. The supplies from October to March would include 160bn INR green bonds. There will be an auction for the borrowing plan later during the day. 

New Delhi wants to raise INR 330bn through bond sales. It would include a paper of a 10-year benchmark. The impact could be marginal of reduced borrowing and would include green bonds. However, the market might react to the decision of the monetary policy. Many market participants expect the RBI to increase the key increase rates for the third consecutive time by 50 basis points. The central bank of India has raised 140 basis points since May to 5.40%. The move came after inflation was above the tolerance level for eight months. FTSE Russell, the global index provider, said they would retain India on the potential upgrade list. There has been a recent spike in the U.S.A yields, and the Indian bonds have not reacted much. Many people believe the inclusion announcement might take place soon. 

Also Read: Importance of bonds in your portfolio.

The demand was seen as weaker than expected at Friday's debt auction. The yield increased by 21 points in the previous month and was the highest since May. We expect the investors in India to return to government bonds of five years because the benchmark 10-year bond yield's spread might rise by 25-30 basis points. In August, the spread stood at 30 basis points before speeding up of the index inclusion talks. However, due to the delay, the yields have reduced, and investors might turn to 5-year bonds. 

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