India bonds inch lower, test key level ahead of RBI rate decision

Indian government bonds dipped slightly in early deals on Tuesday, testing a key technical level, while traders awaited the Reserve Bank of India's policy decision due on Wednesday.

The yield on the benchmark 10-year bond was at 6.3300%, as of 10:30 a.m. IST, compared with Monday's close of 6.3179%.

While some market participants are expecting another interest rate cut by the RBI after U.S. President Donald Trump imposed steep tariff on goods from India, others are anticipating dovish signals in Governor Sanjay Malhotra's speech, which led to a rally in bond prices on Monday.


"The market is expecting a dovish indication in the policy and there will be built up for October cut," said Umesh Tulysan, MD at Delhi-based Sovereign Global Markets.

The central bank changed its stance to "neutral" while cutting the benchmark rate by 50 basis pointsat its June meeting.

Meanwhile, the State Bank of India, which rightly predicted a 50-bp cut in the last meeting, expects the RBI to continue frontloading with another 25-bp cut in August.

SBI said in a note that skipping an August rate cut would be an "error", as inflation is likely to stay rangebound even in financial year 2027, adding that credit growth tends to accelerate when festive seasons arrive early and are preceded by rate cuts.

Lower U.S. Treasury yields are also making room for further downside in domestic bond yields, traders said.

The U.S. 10-year yield was at 4.20% in Asian hours, after weak jobs data raised bets of a Federal Reserve rate-cut in September.

RATES

India's overnight index swap rates saw muted activity and were flat in early market hours as traders stayed put before the RBI policy outcome. The one-year OIS rate was at 5.4550% and the two-year OIS rate was at 5.4125%. The liquid five-year OIS rate was also steady at 5.6500%.