Bond markets were on a roll until March on expectations of rate cuts. The RBI did not disappoint, delivering two cuts in the repo rate – totalling 50 basis points between January and end-March. But the 25-basis-point cut in repo rate on Tuesday is unlikely to lead to an immediate rally in the bond markets. On the contrary, bonds gave up some ground after the policy review. In the past, bond markets seem to have got their interest rate expectations right. The bond yield moving above the repo rate had been an indication that rates would rise. Likewise, when the market expected rates to move south, yields tended to fall below the repo rate. For instance, a few months ago, the market was pricing rate cuts ahead of the policy actions by the RBI. In December, the 10-year G-Sec yield slipped to 7.97 per cent — below the RBI’s 8 per cent repo rate then.

So, if one were to set store by the predictive ability of bond markets, the rally may be in for a pause. The yield on the 10-year government bond has been firming up since the RBI’s rate cut in March. The 10-year G-sec yield (7.7 per cent) is now about 50 basis points above the repo rate (7.25 per cent)

The yield has been trending higher due to the recent turbulence in global bond markets and sudden rise in crude prices. Also, given that the chunk of the rate cut - 75 basis points - has already happened, the market is likely to temper its expectations.

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