What’s going on here?
Indian government bonds stumbled in early trading on November 13, as the central bank and long-term investors scaled back their usual buying activity.
What does this mean?
Domestic heavyweights that typically drive demand for government bonds suddenly eased off, with the Reserve Bank of India and other long-term investors snapping up just 13.8 billion rupees ($155 million) in bonds—well below the recent six-day daily average of over 50 billion rupees. The shift is mainly down to a quieter central bank, prompting traders to worry that the recent rally in bond prices is running out of steam. While headline inflation dipped to just 0.25% in October—a record low, fueled by cheaper food and tax changes—the more stubborn core inflation stayed put at 4.4%, dimming hopes for near-term interest rate cuts. According to STCI Primary Dealer, a rate cut looks unlikely unless the global economic situation weakens further, and the current stretch of low inflation might not stick around.
Why should I care?
For markets: Confidence wavers as bond support thins.
With the central bank and large institutional buyers stepping back, India’s bond markets are feeling the pinch—overnight index swap rates have ticked higher, with the two-year at 5.44% and the five-year at 5.72%. If these key buyers continue to hold off, the recent bond rally could lose momentum, and yields may climb further. Without a clear path to rate cuts, confidence in continued price gains is looking shaky.
The bigger picture: Temporary relief or early warning sign.
India’s record-low inflation has brightened the economic picture for now, but analysts warn that this respite may fade as base effects wear off and price pressures return. With USD/INR trading at 88.69, international investors are weighing how India’s bond trends might interact with global economic risks. For both policymakers and market players, the real question is whether inflation remains subdued—since that will help determine the direction of rates, capital flows, and broader economic stability.
