Monetary policy: Sovereign bonds gain as RBI surprises with rate cut

Shorter-end bonds outperformed while the drop in yields on longer-tenor paper was limited on supply concerns

Sovereign bonds rallied after the central bank unexpectedly cut its key rate and dropped its hawkish stance citing easing inflation, providing relief to traders concerned about a record government borrowing program.

The yield on the most-traded 2028 sovereign bond fell seven basis points to 7.50 per cent, cooling from 7.57 per cent just before the Reserve Bank of India reduced the policy rate for the first time since August 2017. 

The drop marked a shift in sentiment that had pushed up yields by the most since May last week on concerns about widening in the deficit targets.

“While this is clearly a positive