Long Rate Pause?

Bond markets had been signalling a pause in the interest rate cycle. With economic un- certainties, RBI can now get the time to evaluate the impact of GST cuts on consumption

- By SAMAR SRIVASTAVA AND SALIL PANCHAL

IN THE OCTOBER 1 MONETARY policy announcement, the Reserve Bank of India (RBI) held rates steady, and yields of government bonds remained steady as well. This masked the movements of the last two months, where bond yields that had been falling in line with a cut in interest rates by the RBI have moved upwards since July, prompting investors to question the divergence.

The unusual signal by the bond market may point to the conclusion that the best is probably behind us as far as the rate cycle is concerned. The 10-year government bond yield, considered the benchmark, has risen 25 basis points since the central bank's last rate cut in June. It now stands at 6.55 percent.

While in the short term the move could reflect market nervousness over lower-than-expected tax collections, lower expectations of collections on account of a Goods and Services Tax (GST) cut and the nervousness on account of no trade deal with the US, longer term issues are also at play.

But first, a look at the here and now. With Consumer Price Index (CPI) inflation at a benign 2.07 percent in August 2025, there is room for the RBI to cut interest rates. But a consensus that is slowly emerging is that the RBI will most likely wait and not rush.

RBI Governor Sanjay Malhotra, addressing the decision to hold rates, said, "Not just monetary policy, there are other government policies which have been announced and their impact is still unfolding. But there are also uncertainties, we see developments every day and responses to these also. That is why the MPC felt that we should pause [on rates]."