All you need to know: 5 factors influencing bond yields

Economic Outlook FY25: In January, yield on 10-year government security started at 7.20 per cent and ended at 7.14 per cent, a 4 basis points (bps) decrease from December's close of 7.18 per cent and below CRISIL’s forecast range of 7.16-7.26 per cent. In first half of month, it tred between 7.18 per cent and 7.20 per cent.

Yields rose to 7.24 per cent due to higher US Treasury yields and crude oil prices, but were offset by Bloomberg's proposal to include government bonds in Emerging Markets Local Currency Index, which kept market sentiment positive and yields low. 10-year benchmark paper closed mid-month at 7.18 per cent.

economic outlook for fiscal 2025 includes several key factors that are expected to influence country's growth trajectory, including inflation rates, monetary policy decisions, fiscal health, and oil prices. 

GDP Growth

Real GDP growth is expected to moderate to 6.4 per cent in fiscal 2025 from an estimated 7.31 per cent this fiscal year. National Statistical Office's first vance estimates project India's real GDP growth at 7.3 per cent for this fiscal year, slightly higher than previous year's 7.2 per cent. However, stronger growth seen in first half of fiscal year is projected to moderate to 6.9 per cent in second half, and yields are forecasted to fall due to this growth slowdown.

CPI Inflation

Consumer price index (CPI)-linked inflation is expected to soften to 4.5 per cent in fiscal 2025 from an estimated 5.5 per cent this fiscal year. Cooling domestic demand and a higher base for food inflation are expected to help moderate inflation next fiscal year. yields are expected to fall due to inflation. 

RBI's Monetary Policy

An interest rate cut is unlikely in April monetary policy review and may come in June or later. RBI is cautious about cutting rates too soon given that inflation is not fully under control. CIRSIL report expects that policy will have no impact on yield. 

Fiscal Health

budget aims to reduce centre's fiscal deficit to 5.1 per cent of GDP in fiscal 2025 from 5.8 per cent this fiscal year. Gross market borrowing is estimated at Rs. 14.1 lakh crore for fiscal 2025, 8.4 per cent lower than previous year. report records fall in yields due to fiscal health. 

Crude oil prices

Crude prices are expected to average $80-$85 per barrel in fiscal 2025, compared to $82.7 per barrel so far in this fiscal year. Brent crude oil prices increased to $80.2 per barrel on average in January, 3 per cent higher than previous month but 3.4 per cent lower than previous year. yields are forecast to have no impact due to crude oil prices.