Debt Monthly View for June 2025

Chart I: Tracking India’s 10-Year Bond Yields Against Major Global Economies

Source: Bloomberg. Data up to May 30, 2025

Key Highlights that had an impact on bond yields:

United States: U.S. Treasury yields rose sharply, with the 10-year crossing 4.59% due to hawkish Fed signals and fiscal concerns. The Fed held rates steady at 4.25%-4.50%, pausing hikes amid easing inflation but sticky core prices and trade tensions.

India: RBI cut rates three times, including a surprise 50 bps cut in May, (now totaling a 100-bps rate cut this calendar year); reduced the CRR to boost liquidity and shifted its stance from ‘accommodative’ to ‘neutral’. Continuing its liquidity support, RBI conducted ₹25,000 crore in bond buybacks, helping keep India’s 10-year yields stable around the 6.25% range.

Japan: The Bank of Japan kept rates steady, cut growth forecasts due to U.S. tariff risks, but expects inflation to stay near 2% through 2028.

The month of May was marked by heightened geopolitical tension between India and Pakistan. India conducted retaliatory strikes targeting terrorist camps in Pakistan, following a major provocation. The conflict briefly escalated cross-border tensions, leading to market uncertainty, a temporary spike in oil prices, and increased demand for safe-haven assets like the US dollar and gold. However, diplomatic backchannels helped prevent further escalation, and markets soon regained footing.

On the global front, there were signs of relief in the long-standing trade dispute between the United States and China. Both countries agreed to a 90-day pause in the implementation of new tariffs; offering a much-needed breather to global trade flows and supply chains. This move boosted investor sentiment globally and helped stabilize equity and commodity markets. In parallel, the USA and the UK struck a bilateral trade deal, aimed at ensuring smoother post-Brexit commerce. This contributed to a more constructive global risk environment during the latter half of the month.

Chart II: Fed on Hold, Bond Yields Climb: Inflation lower but core inflation remains sticky in the US

Source: Bloomberg. Above data is for the month ended May 25, April 2025 (1 month ago) and Nov 25 (6 month ago).

In May 2025, the U.S. Fed held rates steady at 4.25%–4.50% for the third time, maintaining a cautious stance. Headline inflation eased to 2.3%, but sticky core inflation at 2.9% kept the Fed vigilant. New tariffs and strong jobs data pushed rate cut expectations to late summer, as the Fed balances growth support with inflation risks still above its 2% target.

On the domestic front, India saw strong macro signals in May. The RBI infused ₹1.25 lakh crore via Open Market Operations to maintain ample liquidity and support credit growth. It also declared a record high dividend of ₹2.68 lakh crore to the government, offering a major fiscal boost.

Adding to the positive momentum, India’s Q4 FY25 GDP growth came in at 7.4% YoY (well above broader market expectations). India’s GDP grew by 7.4% YoY in Q4 FY25, exceeding expectations due to strong government capex and lower subsidy payouts. GVA growth also improved to 6.8% YoY, led by agriculture and construction. Agriculture output rose sharply, supported by higher foodgrain production and favorable monsoon forecasts.

Chart III: India’s Economic Resilience Shines Through in Q4 GDP Recovery

Source: Bloomberg. Above data is for the month ended May 25, April 2025 (1 month ago) and Nov 25 (6 month ago).

While private consumption slowed to 6% YoY, especially in urban areas, investment picked up pace. Gross Fixed Capital Formation rose 9.4% YoY, driven by year-end government infrastructure push. Government consumption fell due to reduced subsidies, while imports contracted significantly, adding to net growth.

Looking ahead, we expect the FY26 growth to be close to 6.5% (RBI’s growth estimate for FY 26), supported by rural demand, tax relief for urban consumers, low inflation, falling oil prices, and monetary easing by the RBI. While Q4FY25 had some one-off boosts, underlying momentum is expected to stay intact.

Following the release of strong FY25 GDP data (6.5%), the 10-year benchmark yield rose 4 basis points to 6.29%, as traders scaled back expectations of deep rate cuts. Markets now see terminal policy rates settling higher, around 5.50%–5.75%.

Chart IV: Indian Government bond yield curve has steepened; shorter end reacts to liquidity boost and rate cut expectations

Source: Bloomberg. Above data is for the month ended May 25, April 2025 (1 month ago) and Nov 25 (6 month ago).

Indian bond yields have steadily declined in recent months, even as U.S. yields remained elevated and volatile. Since December 2024, this divergence has reflected contrasting policy paths - an accommodative RBI versus a cautious Fed.

In May 2025, U.S. 10-year Treasury yields rose from 4.16% to 4.40%, while India’s 10-year G-sec yield fell by 7 bps to 6.28%, staying in a tight range. The yield spread narrowed to under 200 bps—far below the 20-year average of 450+ bps. Despite geopolitical tensions, Indian yields continue to soften, driven by easing inflation, pro-growth policy, and improving fiscal dynamics.

Money market yields in India too softened on the back of liquidity support by the RBI. T-bill rates for the 3-month segment plunged post easing in liquidity conditions. Meanwhile, the 3-month AAA PSU CP/CD rates too moved in tandem to the 6.2%- 6.4% range against the 6.5% - 6.7% band on closing basis.

Chart V: Money Market Rates eased on the back of liquidity flux; Corporate bond yields too softened across the curve

Source: Bloomberg. Above data is for the month ended May 25, April 2025 (1 month ago) and Nov 25 (6 month ago). Data on corporate bond yields is for AAA PSU corporate bonds.

The corporate bond yield curve has also steepened, with the spread between 10-year corporate bonds and 10-year G-Secs narrowing to around 63 basis points by the end of May 2025. Despite this, demand for corporate bonds remains robust, matched by steady supply. Corporate bond issuances for FY2025 have reached Rs 8.9 trillion, slightly up from Rs 8.6 trillion in FY2024.

Liquidity management has been focused on enhancing transmission of the rate cuts with RBI infusing substantial durable liquidity since December 2024. Infusion has been made via Cash Reserve Ratio ( CRR) cut , OMO purchase, USD INR buy-sell swaps and buy backs.

Banking system liquidity eased in May 2025 despite seasonal pressures, GST, excise collections, and currency demand. The RBI offset these challenges with significant OMO purchases, pushing core liquidity into surplus. The average daily liquidity stood at Rs 1.7 trillion in surplus for the month of April 2025 (~ 1% of Net Demand and Time Liabilities - NDTL) against a surplus of Rs 1.3 trillion on an average for the month of April 2025.

Chart VI: Banking system liquidity in surplus; Core liquidity too in a surplus ~ 1.4% of NDTL

Source: RBI. Data up to the week ended May 30, 2025

To facilitate smooth transmission of rate cuts, the RBI actively managed liquidity through a Rs 1 trillion OMO purchase program for April 2025 alone and Rs 1.4 trillion in May 2025 as well. Since January 2025, total OMO purchases have reached Rs 4.2 trillion. As a result, core liquidity surged into a surplus of ~ Rs 5 trillion in May 2025 against Rs 1.1 trillion by March 21, 2025.

Chart VII: RBI’s Active Liquidity Management: OMO Purchases Touch Rs 3.8 trillion in CY2025

Source: RBI and Bloomberg. Data up to the period ended May 30, 2025

Liquidity conditions may continue to be supportive in the coming months, as we expect the RBI to remain proactive in managing liquidity. Early May 2025 saw strong spending, following past trends, and was further supported by a large RBI dividend of Rs 2.68 trillion, over and above the OMO.

This should ensure ample liquidity in the first half of the year. However, currency demand and seasonal changes in government balances could lead to tighter conditions in the second half.

India’s retail inflation - Consumer Price Index (CPI) dropped to 3.16% year-on-year in April 2025. This is the lowest level seen since July 2019. The main reason for this decline was a continued fall in food prices, especially vegetables, which have become cheaper for three months in a row.

Core inflation, which excludes food and fuel prices, stayed steady at 4.1% year-on-year. One of the reasons core inflation didn’t fall further is the high price of gold. Rising gold prices pushed up the cost of personal care items, keeping overall core inflation slightly elevated.

Looking ahead, both Skymet and the India Meteorological Department (IMD) are predicting a normal monsoon this year.A normal monsoon forecast supports a positive inflation outlook, though short-term vegetable price spikes remain a risk. With falling crude prices and muted demand, FY26 retail inflation is expected to average around 3.7%.

Chart VIII: RBI’s Growth-Friendly Stance Gets Backing from Softer Inflation

Source: RBI, MOSPI. Data for Inflation is for the month ended April 2025. Data on Repo Rate is up to June 06, 2025.

RBI’s Bold Third Rate Cut Signals Limited Room Ahead

The Reserve Bank of India (RBI) surprised markets by cutting the policy repo rate by 50 basis points (bps), double the expected 25 bps, marking its third consecutive rate cut in this easing cycle. This aggressive move aims to support growth amid global uncertainty and weak domestic demand.

Alongside, RBI announced a phased 100 bps cut in the Cash Reserve Ratio (CRR), releasing about Rs 2.5 trillion liquidity into the banking system. Together, these steps represent RBI’s strongest easing push in recent times.

However, the RBI also shifted its policy stance from “accommodative” to “neutral,” signaling that the scope for further rate cuts is limited. Governor Sanjay Malhotra indicated the central bank will watch how these measures transmit through the economy before making more moves.

The RBI maintained its FY26 GDP growth forecast at 6.5% and lowered its inflation outlook to 3.7%, providing the confidence to act decisively now. The focus now shifts to banks to pass on the benefits and boost credit and investment, while fiscal policy and reforms play a bigger role going forward.

The Indian Rupee (INR) depreciated by around 1.3% against the US Dollar, ending the month at 85.58 from 84.49. This weakness occurred despite a nearly 1% decline in the Dollar Index (DXY), indicating that domestic factors likely drove the rupee’s underperformance.

Chart IX: Rupee weakened against USD; Brent Crude Hits Lows Amid Supply Surge & Demand Fears

Source: Bloomberg. Data up to the month ended May 2025.

Brent crude fell below $60 in early April as rising global supply—driven by OPEC+ ramping up output—clashed with fears of weaker demand amid growing recession risks and escalating U.S. tariffs under Trump. However, by May, prices recovered to the $63–$66 range as trade tensions, particularly between the U.S. and China, began to ease, restoring some market confidence.

Foreign investments in (Indian Government Bond) IGBs saw notable growth in March 2025 alone, with the Fully Accessible Route (FAR) segment receiving an influx of Rs 227 billion during the month alone. However, Foreign investors sold and exited Indian bond markets in April 2025 largely due to a combination of global and domestic factors that raised caution. The trend continued in May 2025 as well.

Geopolitical tensions, particularly between India and Pakistan, escalated after the Pahalgam attack. This increased risk perception among foreign investors. U.S. trade tensions and tariffs under President Trump created volatility in global markets, prompting a flight to safety (e.g., U.S. Treasuries).

Chart X: Global Jitters & Geopolitical Tensions Trigger Foreign Exit from Indian Bonds

Source: CCIL. Data up to the month ended May 2025

In the medium term, global financial markets are expected to experience reduced volatility. The USD is likely to stabilize within its current range, potentially leading to a reversal of the safe-haven trade, which may result in increased capital flows into Emerging Markets (EMs) like India.

Market Outlook

In April 2025, the RBI cut the repo rate by 25 bps to 6% and turned accommodative to support growth. In its June 2025 policy, it slashed the repo rates by another 50 bps to 5.5%, signaling urgency in frontloading support amid global uncertainty and domestic demand softness. This marks the third straight cut in the current cycle.

Alongside, the RBI announced a phased 100 bps CRR cut, expected to inject ₹2.5 trillion into the banking system, enhancing liquidity support.

However, the stance reverted from "accommodative" to "neutral," suggesting limited room for further easing. Governor Malhotra signaled a pause, preferring to assess the impact before more action.

GDP growth for FY26 remains unchanged at 6.5%, while inflation projections were cut to 3.7%.

With borrowing costs down and liquidity rising, the focus now shifts to transmission and credit pick-up. Fiscal support and structural reforms will also need to play a stronger role.

From a bond market perspective, this was a stronger-than-expected move. But with the policy stance now neutral, we believe the terminal rate has likely been reached. A final 25 bps cut may still be possible depending on inflation, growth slowdown and real rates.

We expect the yield curve to steepen some more and then remain rangebound in the near term. Global risks, U.S. tariffs, recession fears, and geopolitical tensions, may cap further yield gains.

Despite short-term volatility, we maintain a positive medium-term view on bonds supported by:

• Declining net supply of government bonds

• Steady demand from long-term domestic investors

• India’s inclusion in global bond indices

• Scope for more RBI OMOs

Given limited room for deeper rate cuts, we are gradually reducing portfolio duration, shifting towards shorter-term bonds to manage downside risks in a flattish curve environment.

What can investors do?

Given the above factors, we expect the bond yields to go down (prices to go up). In this declining interest rate environment, investors with medium to long investment horizon, can consider dynamic bond funds. These funds can allocate to long-duration bonds while keeping flexibility to adjust portfolio position if market conditions change. This adaptability allows investors to remain invested for a longer period.

For investors with shorter investment horizons and a low risk tolerance, liquid funds remain the more suitable option.

Source: Reserve Bank of India (RBI), Ministry of Statistics & Program Implementation (MOSPI), Bloomberg

Disclaimer, Statutory Details & Risk Factors: The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

Above article is authored by Quantum.

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