All you need to know: 5 factors influencing bond yields

Economic Outlook FY25: In January, the yield on the 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 the first half of the month, it traded 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 the Emerging Markets Local Currency Index, which kept market sentiment positive and yields low. The 10-year benchmark paper closed the mid-month at 7.18 per cent.

The economic outlook for fiscal 2025 includes several key factors that are expected to influence the 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. The National Statistical Office's first advance estimates project India's real GDP growth at 7.3 per cent for this fiscal year, slightly higher than the previous year's 7.2 per cent. However, the stronger growth seen in the first half of the fiscal year is projected to moderate to 6.9 per cent in the second half, and the 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. The yields are expected to fall due to inflation. 

RBI's Monetary Policy

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

Fiscal Health

The budget aims to reduce the 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 the previous year. The report records the fall in yields due to the 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 the previous month but 3.4 per cent lower than the previous year. The yields are forecast to have no impact due to the crude oil prices.