The bond market is expected to post losses this month despite the strong positives in the form of rate cuts in end-February.
Further it will witness consolidation, phases of tight liquidity, selling pressure on year-end considerations and event uncertainty.
"We expect the markets to correct despite the repo rate cut, as the immediate price action seems to be exaggerated without any consideration to near term negatives," DSP Merrill Lynch said in its latest monthly report on fixed income strategy.
The investment bank expects the bond market to stay weak and in a range in the first half of the month.
"Cash levels can be reduced later to take advantage of the sideways movement once the correction is over. We expect the gilt curve to become steeper and the credit segments to underperform," it said.
Another State loan issue in March coupled with advance tax outflows around mid-March should keep liquidity conditions moving both ways thereby making it difficult to take a directional call.
However, historically the markets have rallied in the last week of March. DSP ML expects the RBI to reduce the bank rate in April and there could be more cash reserve ratio cuts on the anvil.
Further cuts in repo rate would be dependent on inflation and growth in the coming months.
It pointed out that globally bond markets rally in the event of war on account of safe-haven considerations.
"If we accept that Indian markets are different and are impacted by rising oil prices, this would cause inflation to rise and defer the expected rate cuts. This logic fails given the fact that the RBI has already cut rates. Also, supply shock inflation normally does not cause a change in policy bias, as tighter policy cannot control that rise in inflation," DSP ML said.
© 2025