Bond Market Neutral For Now, But Easing Front-load Pulls Yield Target Forward

The Reserve Bank of India’s surprise triple play—a larger-than-expected 50 basis point repo cut, a shift to a neutral stance, and a 100 basis point CRR reduction, has not altered QuantEco Research’s terminal yield view for the 10-year government bond. 

QuantEco Research continues to forecast the benchmark yield at 6.00%, but expects this level to be reached earlier than previously projected, likely during the October–December quarter. From that point, the yield is seen drifting moderately higher to 6.20% by March 2026, as the market begins to price in a return of inflation pressures in 2026–27.

The initial market reaction may be subdued, as the aggressive rate cut is counterbalanced by the RBI’s shift in stance and clear communication that further cuts are unlikely. QuantEco sees the front-loading of monetary easing as a tactical move rather than a signal of a sustained easing cycle. 

Real rates are expected to fall toward the lower end of the estimated neutral band of 0.8–2.1% by the end of 2025–26, limiting scope for further accommodation barring significant downside surprises.

From a liquidity standpoint, the CRR cut—expected to inject ₹2.5 trillion between September and November will ease money market conditions and improve visibility for near-term pricing. QuantEco expects core liquidity surplus to peak at 2.7% of NDTL in the third quarter, up from 0.9% in the March quarter, facilitating smoother policy transmission and reducing the need for bond purchases via open market operations.

Macro projections have largely held steady. GDP growth for 2025–26 remains at 6.5%, with QuantEco pegging its own estimate slightly lower at 6.4%. The real story, however, lies in the evolving inflation dynamics. 

CPI inflation is now projected at 3.7% by the RBI, revised down by 30 basis points, supported by disinflation in food and a more stable rupee. QuantEco flags the early onset of monsoons, an upgraded rainfall forecast, and a sharp cooling in food inflation, down to 2.1% in May from 9.7% in October, as key disinflationary drivers.

The RBI’s calibrated move to neutral suggests a pause ahead. QuantEco expects no rate action in August and sees the repo rate being held at 5.50% through the financial year, aligning with the central bank’s medium-term outlook that inflation will inch up toward 4.5% in 2026–27.

In short, the policy outcome tightens the range of bond yield expectations in the near term. With clarity on liquidity and policy stance now in place, the bond market may stabilise sooner than anticipated, but not without factoring in the long tail of inflation risks ahead.