The form of the g-sec yield curve encapsulates the influence of financial coverage, authorities borrowing in addition to market contributors expectations. Its one a one cease report card for each coverage in addition to economic system. So, what’s the yield curve telling us in 2025?
The curve has steepened to ranges final seen in 2022-2021. The decline in yield has taken place within the short-end, pushed by RBI rate-cutting cycle of 100bps. The ultra-long bond yields (20yr to 50yr) have hardly moved regardless of vital coverage easing by RBI. The apathy on the long-end displays three elements – rising focus of provide of extremely lengthy bonds, lack of market expectation of additional fee cuts and weak insurance coverage demand.
Within the first six months of 2025 (January to June), 32% share within the gross provide of centre and state authorities bonds was within the ultra-long finish (20yr to 50yr). The rising focus was pushed by the necessity to lengthen the maturity profile of Normal Authorities debt and rising investor demand. Nevertheless, the insurance coverage sector demand has weakened not too long ago with a pointy drop in premium progress. Lastly, the change in stance to impartial within the June coverage has firmed expectations that the rate-cutting cycle may very well be over.
Trying forward, there may very well be some assist to ultra-long bonds if the H2FY26 g-sec calendar is much less concentrated. That stated, the redemption stress is critical over the following 6 years (FY27 to FY32) with g-sec plus SDL redemption starting from INR10.2tn in FY27 to INR12.6tn in FY32. Therefore, if the focus within the ultra-long bond section is to be lowered, it may very well be shifted solely to the 15-year level. The Centre can be conducting extra switches this 12 months to scale back the redemption stress over the following few years, which is including provide to the stomach of the curve.
Quick-end yields, which have seen a considerable discount, received assist from fee cuts by the RBI in addition to liquidity infusion. Trying forward, there may be assist from the RBI anticipated to chop coverage charges by one other 25bps in October / December. The OIS market is simply starting to partially value in a fee minimize, submit the June CPI print. The area to ease coverage charges is derived from expectations that CPI inflation will considerably undershoot the RBI’s estimate. FY26 CPI inflation is monitoring at 2.7% v/s RBI’s estimate of three.7%. We anticipate fee minimize expectations to agency up within the coming months. The extra vital assist to short-end yields would be the substantial surge in banking system liquidity, which is anticipated to peak at INR5tn by November / December. CRR might be lowered by 1% unfold over September to November. This can infuse sturdy liquidity of INR2.5tn.
Demand tendencies
From a requirement perspective, whereas insurance coverage sector demand is weak, demand from different investor segments has held up, equivalent to pensions and PFs, supported by robust AUM progress. Banks’ demand, which was weak in FY25, is anticipated to be stronger in FY26. That is supported by not simply the low value of funds but additionally the anticipated moderation within the credit-to-deposit ratio. The substantial, sturdy liquidity infusion by the RBI is starting to have an effect on deposit progress, whose momentum in Q1FY26 has picked up. The discount in value of funds for banks has resulted in them shifting in direction of the brief finish of the curve.
The steep yield curve additionally displays that the market evaluation of progress just isn’t very detrimental. Therefore expectation of a deep fee minimize cycle isn’t there regardless of a major undershoot in inflation. Certainly, our progress evaluation is just like RBI’s, with FY26 GDP progress anticipated to be 6.3%. The weak point in progress is seen in city demand and personal company capex. In the meantime, progress will get assist from rural demand, which is anticipated to get better with robust crop output and an increase in rural wages. Authorities capital expenditure, which had slowed final 12 months because of the elections, is anticipated to choose up in FY26 each on the Centre and State ranges.
Story of two ends
Therefore, the short-end of the curve may nonetheless see additional discount in yields, supported by a considerable rise in liquidity and the RBI nonetheless having area to ease charges. The long-end of the curve will see restricted assist as nearly all of the speed minimize cycle is over, and the demand-supply dynamic is much less supportive. 10yr g-sec yield is anticipated to vary between 6.15% to six.35%.
(The creator is Chief Economist, IDFC First Financial institution)
Disclaimer: This story is for academic functions solely. The views and proposals made above are these of particular person analysts or broking firms, and never of Mint. We advise traders to test with licensed specialists earlier than making any funding selections.
