Indian government bond prices have exhibited stability recently, with a slight downward trend in yields anticipated as the market awaits the Reserve Bank of India's (RBI) upcoming monetary policy decision. The yield on the benchmark 10-year bond was around 6.2008% on June 3rd, a marginal decrease from the previous close of 6.2022%.

The RBI's policy decision, expected on June 6, 2025, is widely anticipated to include a 25 basis point rate cut, marking the third consecutive reduction of this magnitude. The central bank has already reduced policy rates by 50 basis points earlier in the year and injected $100 billion into the banking system between December 2024 and May 2025. While a 25 bps cut is largely priced in, some market participants suggest the possibility of a more aggressive 50 bps cut to further stimulate credit growth. The State Bank of India, for instance, has advocated for a 50 bps reduction to reinvigorate the credit cycle.

Market sentiment is influenced by India's robust economic growth, which surged to 7.4% in the January-March quarter, exceeding earlier forecasts. However, the first growth indicators for April have appeared soft. This mixed data contributes to the cautious optimism surrounding the bond market. Expectations for future rate cuts have been tempered, and the focus is now on the Governor's commentary to gain insights into the central bank's future easing trajectory.

Liquidity conditions also play a crucial role. India's widening liquidity surplus has supported positive sentiment, reaching its highest level since July 2022. In May 2025, the daily average surplus stood at 1.71 trillion rupees, a more than 20% increase compared to April.

Despite these positive factors, foreign investors have been net sellers of Indian bonds, with net sales of 270 billion rupees since April 1 from bonds included in global indexes. These outflows could be attributed to factors such as tariff-related uncertainties. However, there is optimism that Indian bonds will remain attractive to foreign investors once these uncertainties subside, driven by the country's higher yields and stable economic conditions.

Overnight index swap (OIS) rates are expected to remain range-bound in the near term, with shallow trading volumes.