Benchmark INR bond yields have held steady in recent sessions, post the auction cancellation (see here) as well as likely secondary market purchases. While a confirmation is awaited, there were signs of an increase in support via secondary market purchases under the ‘others’ buyer category, totalling over INR200bn last week and more underway this week. In a bid to widen support beyond the most liquid papers, expectations are that a formal announcement on open market operations might follow, which will have a more salutary impact on bonds. Meanwhile, in view of recent hardening in yields, local press cited official sources saying that states had been asked to defer bond auctions to ease supply and prevent crowding out during periods which are already auction-heavy. This might lead to a back-end heavy supply in SDLs at the last quarter of FY26 (Jan-Mar26) when the central government’s borrowing calendar typically lightens up. To recall, a top tax-revenue generating state had rejected all bids due to unacceptably high borrowing costs earlier in the month. States had planned to raise INR 2.81trn in 3QFY26 vs INR 3trn quarter before, with 3Q borrowings likely lower due to two tranches of tax devolution in October by the centre, providing a cushion to the revenue accounts.
October CPI inflation out mid-week is expected to have eased to a fresh low of 0.2% yoy (weakest print in the current series) from 1.5% in Sep on continued food disinflation, base effects, and impact of GST cuts. Food disinflation is set to deepen as high-frequency trends pointed to a correction in perishables, pulses, cereals etc. In addition, the disinflationary impulse from indirect tax relaxation should be more apparent as changes took effect in late Sept. October is, nonetheless, likely to mark the trough in the current cycle, with base effects expected to see inflation resume its gradual climb in the coming months. The RBI’s move in December will be a close call, as 2QFY GDP data in late-Nov will show growth at a firm 7%+, while this week’s inflation release is set to ease to a series low. Progress on the US-India trade deal is also awaited. INR bonds will, meanwhile, also track US yield movements, which have been sticky to higher in recent sessions. Counting on the central bank’s participation and dovish policy guidance, we expect 10Y yields to ease by end FY year.
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