RBI's cash withdrawals push India’s bond curve toward flattening

The Reserve Bank of India has intensified its removal of surplus cash, a move that is expected to compress the spread between five-year and ten-year government bond yields. Market participants forecast the five-year rate could rise to about 7% from its current level, while the ten-year remains relatively unchanged, narrowing the gap to as little as 10 basis points. Treasury officials at ICBC and Anand Rathi recommend shifting from five-year to ten-year bonds to capture the flattening trend.

The RBI has already withdrawn over 1 trillion rupees and may raise its policy rate by 25 basis points to 5.50%, the first increase since early 2023. Such a hike would likely push overnight rates nearer or above the repo rate, further flattening or mildly inverting the curve. Analysts note that continued aggressive tightening could sustain pressure on short-dated yields.