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Informist, Tuesday, Jul 23, 2024

By Nishat Anjum

MUMBAI – After a day of choppy trade following the presentation of the Union Budget for 2024-25 (Apr-Mar), government bond prices ended little changed. While a lower-than-expected cut in market borrowings disappointed some traders, a downward revision in the fiscal deficit target for 2024-25 comforted many, dealers said.

The 10-year benchmark 7.10%, 2034 bond ended at 100.90 rupees, or 6.97% yield, against 100.92 rupees, or 6.97% yield, on Monday.

In the Budget, the government's gross borrowings for the year are pegged at 14.01 trln rupees against the market expectations of 13.81 trln rupees. On a net basis, the government pegged it at 11.63 trln rupees against the market expectations of 11.42 trln rupees. In the interim Budget, presented on Feb 1, the net borrowing through dated securities was 11.75 trln rupees for 2024-25.

"I agree that the (reduction) is lower than what the market was expecting, but I would still say it's not overall a negative," a dealer at a state-owned bank said. "Fiscal deficit is a big positive. We have not sold today, and I heard foreign banks also held on to their bonds."

The market took comfort in the downward revision of the fiscal deficit target to 4.9% of GDP for 2024-25, lower than expectations of 5.0%, dealers said. Following the announcement of the fiscal deficit target, gilt prices surged, only to erase most gains due to the less-than-expected market borrowing cut.

Dealers said the reduction in the fiscal deficit target for the current year and expectations of robust goods and services tax collection could increase the possibility of a cut in market borrowings towards the end of 2024-25. For the current financial year, the GST mop-up is expected to be 10.62 trln rupees.

Traders who had bought heavily on expectations of a deeper borrowing cut trimmed gilt holdings during the day. This weighed on the benchmark 7.10%, 2034 bond, which has the highest trade volume, dealers said.

The sceptics saw the reduction in borrowing through dated securities as a token cut, dealers said. This comes against the backdrop of the Reserve Bank of India rejecting bids for 60-bln-rupee 2034 green bonds in May, which translates to an incremental cut of only 60 bln rupees.

Following the record surplus transfer from the RBI to the central government, the market was expecting a cut of around 500 bln rupees in borrowing, dealers said. The RBI had transferred 2.11 trln rupees to the central government.

In the secondary market, longer-term bonds ended on a mixed note. Due to a flattish gilt yield curve, investors found the current yield levels on the 7.30%, 2053 bond and the 7.34%, 2063 bond unattractive, as they are trading only 3-7 basis points higher than the benchmark 7.18%, 2037 bond. This, however, led to some gains in the benchmark 2037 bond.

"It was a day with a lot of information but very range-ish trading. So I would say one should wait a couple of days to talk about the curvature change," a dealer at a private bank said.

The market is now looking at offshore cues for further direction, dealers said. The US Federal Open Market Committee meeting, which is scheduled at the end of the month, may lend some cues regarding rate cuts in the US. This may give some clarity on rate cuts in India, dealers said. Even if the FOMC keeps rates unchanged at 5.25-5.50% at its upcoming meeting, a cut is almost certain in September, dealers said. In such a scenario, rate cuts in India would begin in October, they added.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 865.35 bln rupees, against 459.00 bln rupees on Monday. Two trades worth 200 mln rupees were carried out using the wholesale digital rupee pilot, same as on Monday.

OUTLOOK

On Wednesday, government bond prices are seen opening steady as the market may lack significant cues after the Budget, dealers said. During the day traders are likely to trim bond holdings ahead of the weekly auction on Friday, which has a huge fresh supply, dealers said, with the government selling three dated securities worth 350 bln rupees.

Traders will now turn their focus to data from the US, due this week. The market may also take cues from the comments of various US Federal Reserve officials who are lined up to speak in the week, dealers said.

Dallas Fed President Lorie Logan and Federal Reserve Board Governor Michelle Bowman will speak at an event today. On Thursday, US Apr-Jun GDP is scheduled to be released, while personal income and outlays for June are due on Friday.

Any sharp movement in US Treasury yields and crude oil prices may also lend cues at the opening. The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.93-7.02% during the day.

India Gilts: Recover all losses; longer-term bonds lead gains

MUMBAI--1442 IST--Government bond prices recovered all losses and rose post the Union Budget for 2024-25 (Apr-Mar). The market saw the Budget as a positive overall, with the downward revision of the fiscal deficit target, and some reduction in market borrowing even if it was less than expected, dealers said.

For 2024-25, the government's gross borrowings are pegged at 14.01 trln rupees against the market expectations of 13.81 trln rupees. On a net basis, the government pegged it at 11.63 trln rupees against the market expectations of 11.42 trln rupees.

Dealers said that reduction in the fiscal deficit target for the current year and expectations of robust goods and services tax collection, could increase the possibility of a cut in market borrowing towards the end of 2024-25.

However, others said traders had already bought heavily on the optimism around the Budget. Now, as the market borrowing cut is not on expected lines, the yield on the benchmark 7.10%, 2034 bond may see an uptick and rise to 6.98-6.99% levels, they added.

While the Budget led to volatility in gilt prices, it left the market directionless when it comes to the gilt trajectory, dealers said. "Again we are sitting directionless after the event. (Benchmark) 14-, 5-year bonds are still holding their levels, but ideally there should be some sell-off towards the end of the day. Given that the majority of the market was expecting a higher cut," a dealer at a state-owned bank said.

The market now looks forward to offshore cues for further direction, dealers said. The Federal Open Market Committee meeting, which is scheduled towards the end of the month, may lend some cues regarding rate cuts in the US. This may give some clarity over rate cuts back home, dealers said.

Even if the US rate-setting panel keeps rates unchanged at 5.25-5.50% in the upcoming meeting, cuts would happen in September, dealers said. In such a scenario, rate cuts in India would begin in October, they added.

In the secondary market, the longer-term government securities, such as the 7.18%, 2037 bond, led the gains as investors bought these papers for their asset liability management needs, dealers said. As the recent issuance of infrastructure bonds slowed down, the longer-term gilts saw traction, they added. Some state-owned banks and private banks were selling their gilts holdings, while foreign banks, which bought heavily in the month, were not on the selling side, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 701.05 bln rupees, against 292.05 bln rupees at 1425 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.94-7.00%.  (Nishat Anjum)

India Gilts: Fall; downward revision of FY25 fisc gap aim limits losses

MUMBAI--1229 IST--Prices of government bonds fell more as traders trimmed their bond holdings as the Budget indicated a lower-than-expected cut in market borrowing for 2024-25 (Apr-Mar). However, the market took some comfort following the downward revision in the fiscal deficit target to 4.9% of GDP for 2024-25, lower than expectations of 5.0%, dealers said. 

"The market is a little disappointed with just a minimal cut in borrowings," a dealer at a private bank said. "But the reaction was not sharp as the market is still positive on fiscal deficit front."

Finance Minister Nirmala Sitharaman, while presenting the Union Budget for 2024-25, said that the government's gross borrowings for the year are pegged at 14.01 trln rupees against the market expectations of 13.81 trln rupees. On a net basis, the government pegged it at 11.63 trln rupees against the market expectations of 11.42 trln rupees.

The reduction in borrowing through dated securities was seen as a token cut, dealers said. This comes against the backdrop of the Reserve Bank of India rejecting bids for 60-bln-rupee 2034 green bonds in May, which translates into an incremental cut of only 60 bln rupees.

Post the record surplus transfer from the RBI to the central government, the market was expecting a cut of around 500 bln rupees in borrowing, dealers said. The RBI had transferred 2.11 trln rupees to the central government. 

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 531.75 bln rupees, against 192.65 bln rupees at 1230 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-7.05%.  (Anupreksha Jain)

India Gilts: Down; erase all gains as Budget focuses on welfare schemes

MUMBAI--1135 IST--Prices of government bonds fell, erasing all gains as the Union Budget 2024-25 (Apr-Mar) focused on welfare spending, dealers said. This led to traders trimming bond holdings. However, it was not enough to erase expectations of a borrowing cut, they said. 

Finance Minister Nirmala Sitaraman said that 1.52 trln rupees will be allocated to agriculture and allied sectors and 2.66 trln rupees for rural development and infrastructure. Other scheme-based spending, focused on road development and education loans, was also announced in the Budget speech today. 

However, the market reaction was not too stark as it awaits the borrowing figure, dealers said. The market expects the net issuance of dated securities to fall to 11.42 trln rupees from 11.75 trln announced in the Interim Budget. 

The Budget speech so far would have also led investors to bid at a higher yield cut-off for state government securities in the second half of the auction, scheduled 1030-1130 IST, dealers said. This comes against the backdrop of gilt prices falling in the secondary market. As per an Informist poll, participants expected the cut-off yields on 10-year state bonds to be around 7.34-7.35%.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 223.60 bln rupees, against 124.60 bln rupees at 1130 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-7.05%.  (M.C. Adhiinthran)

India Gilts: Steady; traders on sidelines ahead of FY25 Budget speech

MUMBAI--0927 IST--Prices of government bonds were little changed as traders refrained from placing aggressive bets on caution ahead of the Union Budget speech at 1100 IST by Finance Minister Nirmala Sitharaman, dealers said. The Budget will set the fiscal consolidation path and potential inflation generation if the government's revenue spending picks up, dealers said

Owing to widespread expectation that the government may announce a borrowing cut and a downward revision in the fiscal deficit target for 2024-25 (Apr-Mar), every segment of the market has bought government bonds and is pretty full up on their portfolios, dealers said. Amongst market participants, state-owned banks and foreign banks were seen on the buying side. Meanwhile, some said that private banks were also buying gilts in smaller quantities as they heavily sold government bonds on Monday. According to the Clearing Corp of India Ltd data, private banks were the top net sellers on Monday, with 67.86 bln rupees of bond sales in the secondary market.

The market expects the government to lower its fiscal deficit target to 5.0% of GDP from 5.1% announced in the Interim Budget, with a corresponding cut of around 300 bln rupees from the 14.13-trln-rupee target for dated securities on a gross basis. Some participants in the market expect the government to lower its fiscal deficit target to as low as 4.8% of GDP, dealers said. 

If the government does not announce any cut in borrowings or retains its fiscal deficit target at 5.1% of GDP, then the yield on the 10-year benchmark may jump higher than 7.00%, dealers said. While this is not the base case, investors' bond purchases may prevent the benchmark yield rising beyond 7.05%.

"It all depends on what she (Finance Minister Sitharaman) says in the Budget speech," a dealer at a primary dealership said. "Traders and investors are carrying huge risks as there are expectations of positive surprises, but if nothing turns out as per the expectations, then we will not be able to see these levels anytime soon."

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 30.25 bln rupees, against 42.05 bln rupees at 0930 IST on Monday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-7.05%. (Anupreksha Jain)

India Gilts: Seen steady ahead of FY25 Budget speech 1100 IST

MUMBAI – Prices of government bonds are seen opening steady with a slight bias towards buying momentum ahead of the Union Budget for 2024-25 (Apr-Mar), dealers said. Finance Minister Nirmala Sitharaman will begin her Budget speech at 1100 IST.

The yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.90-7.05%, against 6.97% on Monday. Traders and investors have stuffed their portfolios with bonds, and are carrying a significant amount of risk into the event, dealers said.

In the Budget, the market largely expects a cut of around 250-300 bln rupees in borrowing from the target of 14.13 trln rupees outlined in the Interim Budget, dealers said. The yield on the 10-year benchmark, 7.10%, 2034 bond, may fall to 6.90% if the government announces a larger borrowing cut in dated securities. In an Informist poll, the largest borrowing cut expected was around 550 bln rupees. At those levels, state-owned banks might book profit, while a break of the 6.90% level on the 10-year bond could lead to stop-losses on short bets and propel the yield down further, dealers said.

However, a section of the market expects the government to announce a cut in borrowing through Treasury bills, rather than dated securities, dealers said. This is because it would be too early for the Centre to be sure of its fiscal math until March. It would rather wait till the end of the financial year to announce the cuts, or cancel the last few auctions, they added.

In case the government does not announce any cut in borrowing through dated securities, the yield on the benchmark 10-year paper may rise to 7.02%, dealers said. Another key point the market will be watching out for is the fiscal deficit target of the government and its trajectory going forward, dealers said.

According to an Informist poll, respondents said they expect the government to lower its fiscal deficit target to 5.0% of GDP from 5.1% announced in the Interim Budget. Some participants in the market expect the government to lower its fiscal deficit target to as low as 4.8% of GDP, dealers said. 

On the global front, the yield on the 10-year benchmark, the US Treasury note, rose slightly to 4.25% from 4.23% at the time the Indian market closed on Monday. Global cues are likely to be irrelevant as all eyes are on the Budget and its consequences, including potential inflation generation if the government's revenue spending picks up, dealers said.  (Anupreksha Jain)

End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Edited by Rajeev Pai

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