Related Insights
INR bond yields remained firm into the new year, against the backdrop of low inflation, accommodative (but cautious) policy and actively managed liquidity. After acting at the early-Dec rate review, the RBI announced another tranche of open market operations (OMOs) and USDINR FX swap in mid-Dec, besides intermittent short-term money market operations. Despite this, the still elevated bond yields reflect the underlying dominance of fiscal policy over monetary stance, driven by two reasons. State borrowings have been bunched up in 1Q26 (4QFY26) with plans to borrow a quarterly record of INR 5trn, at the higher end of expectations, after the size was scaled back in the previous two quarters to prevent hardening in yields. On a broader note, this also reflects the growing size of SDL issuances, narrowing the gap with the centre. Secondly, besides an active central bank, other institutional buyers face hurdles. For instance, tepid replacement demand from banks, incremental interest from pension funds has leaned towards equities and insurance companies are constrained by regulatory issues. Add to this, the centre has rationalised the share of the long-term paper in its issuance mix (still higher than past trends), states are still to follow suit.
10Y Gsec yield inched back up past 6.6%, with shorter tenors paring rate cut expectations. The second tranche of bond purchases via OMO was concluded overnight, with the central bank purchasing primarily in the 2035-36 segment. Surplus in the domestic banking liquidity narrowed to sub-INR 1trn last month and remained near those levels this month, not helped by further leakage on account on persistent FX intervention. On liquidity, while the upcoming GST outflows will be a drain, the impact will be offset by pipeline OMOs plus swap, besides higher government spending, helping to keep the balance in green. Further support measures will be required to take the surplus closer to the desired 1% of net demand and time liabilities (NDTL). The Union Budget presentation on 1 February will be the next catalyst, where markets will seek cues for the size of FY27 borrowings. RBI policy meeting will follow on February 4 to 6. We expect the policy rates to remain unchanged next month. In light of the prevailing supply glut, INR yields are likely to exhibit an upside bias in the near-term within 6.6-6.7% range, with OMOs to provide some relief even if not lead to a bond rally. Meanwhile, signals on the progress of US-India trade deal remain mixed, just as local refiners’ pare demand for Russian oil.
Topic
Explore more
E & S Macro StrategyGENERAL DISCLOSURE/ DISCLAIMER (For Macroeconomics, Currencies, Interest Rates & Digital Assets)
The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
[#for Distribution in Singapore] This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.
DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.
DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability. 18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability. 11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.
Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply. The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.