RBI repo rate set for climb as inflation pressure mounts

The Union Bank of India report indicates that government bond yields are already absorbing the shock of this anticipated policy shift. Throughout September, the 5-year G-Sec yield surged by 45 basis points, significantly outpacing the 10-year tenor. This movement squeezed the yield spread to just 16 basis points, reflecting heightened market sensitivity to liquidity conditions and a heavy supply of long-tenor debt. While the government maintains a gross borrowing target of Rs 7.86 lakh crore for the second half of the fiscal year, aggressive switch auctions have helped manage redemption pressures, keeping net borrowing requirements stable.

Liquidity management remains a central challenge for the regulator. By utilizing variable rate reverse repo auctions and open market operations, the central bank successfully slashed the systemic surplus from Rs 11.16 lakh crore in early September to Rs 4.85 lakh crore by month-end. Despite these interventions, the outlook for bond markets remains strained. Analysts warn that if policy tightening aligns with sustained energy costs and rising global yields, the 10-year G-Sec will face sustained upward pressure, testing the resilience of domestic debt auctions.