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Informist, Wednesday, Aug 7, 2024

By Aaryan Khanna

MUMBAI – Government bond prices ended higher today as traders bet on the Reserve Bank of India's Monetary Policy Committee changing its stance to "neutral" from "withdrawal of accommodation", dealers said. RBI Governor Shaktikanta Das will detail the outcome of the three-day monetary policy review at 1000 IST on Thursday.

The 10-year benchmark 7.10%, 2034 bond closed at 101.64 rupees, or 6.86% yield, against 101.55 rupees, or 6.88% yield, on Tuesday.

Bond prices continued rising on traders' buys, as optimism mounted that a stance change was imminent. Foreign banks and private banks have bought gilts aggressively. Even if a change in stance does not materialise, the tone of Das on monetary policy is likely to soften considering risks to the global growth outlook, dealers said.

"Honestly, it is a close call. It is just better to keep a small position open instead of sell now," a dealer at a state-owned bank. "Most of us have come in at an entry point where we will not endure too much of a loss if it is a status quo."

The rate-setting panel was already close to changing stance, with two dissensions on the status quo vote in the previous policy review in June, dealers said. The central bank had also let the surplus liquidity in the banking system rise to over 2.5 trln rupees, inconsistent with the "withdrawal of accommodation", without any significant durable measures to mop-up liquidity, they said.

Last week, the US Federal Open Market Committee pointed to risks to its dual mandate of inflation and jobs, after stressing on only inflation over the last two years. Following the statement, the US unemployment rate rose to a near-three-year high of 4.3% in July.

Prices also ended higher due to the absence of aggressive profit booking from state-owned banks, though primary dealerships likely trimmed their holdings ahead of the rate decision, dealers said. Traders disregarded an overnight rise in US Treasury yields that persisted through the day.

Yield on the 10-year benchmark US Treasury note rose to 3.93% at the end of Indian market hours today, from 3.85% on Tuesday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

US yields rose after Federal Reserve officials eased fears of a recession in the world's largest economy, which was seen heralding an aggressive US rate cut cycle beginning in September. San Francisco Fed President Mary Daly accepted that the US economy was slowing, but denied it was falling off a cliff.

On Monday, Chicago Federal Reserve President Austan Goolsbee cautioned against too much signal from a global market sell-off. He said it stemmed in part from the Bank of Japan's decision last week to raise rates. He said that US jobs data for July did not indicate a recession, while noting that Fed policymakers must carefully monitor changes in the US economy to avoid being too restrictive with interest rates. 

"It is not surprising that US Treasury yields have bounced up," a dealer at a private bank said. "Around 3.78% is where there was a technical resistance for the US 10-year yield, which it broke and then reversed from. I don't think it has too much of an upside here."

Amid market turmoil across the globe, some sections of the market remained unconvinced that the MPC would change its monetary policy stance on Thursday. There were risks that the RBI would prefer to retain its stance and clamp down on the liquidity surplus, dealers said. Moreover, there remained the fear that the central bank would announce a calendar for open market bond sale auctions of up to 1 trln rupees to mop-up surplus liquidity. Domestic growth momentum was slowing only marginally, unlike in the US where the unemployment rate shot up to a near three-year high in July, they said. The RBI had already sold over 100 bln rupees in July through open market sales in the secondary market.

Gains on a stance change would be limited due to the optimism built up ahead of the policy decision, and the 10-year yield may not fall below 6.80% unless the RBI signals an imminent rate cut, dealers said. If a stance change does not happen, the yield on the 10-year gilt could rise to 6.92%. An OMO sale calendar would see the benchmark yield spike to over 7%, depending on the size on the planned sales, they said.

Meanwhile, long-term bonds ended higher on Tuesday when the rest of the market fell, and rose again today, in line with the 10-year benchmark gilt. Investors wanted to lock in returns on these bonds, especially as 7.05% was considered a lucrative yield during current market conditions on the 10-year, which were considered lucrative. A sharp fall in the five-year overnight indexed swap rate had also spurred demand for bond-forward rate agreements. Since underwriting these trades were cheaper for life insurers, they had piled onto gilts maturing in above 30 years using this mode, dealers said.

"There is a lot of demand for the long-end whenever there's a minor correction," a dealer at a life insurer said. "Investors deploy cash almost immediately, if yields rise by even 2 bps or so (on the 30-50 year bonds)."

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 608.15 bln rupees, slightly higher than 585.60 bln rupees on Tuesday. There were two trades worth 100 mln rupees carried out using the wholesale digital rupee pilot today, against six trades worth 300 mln rupees on Tuesday.

OUTLOOK

On Thursday, bond prices are likely to open steady before Das details the outcome of the Monetary Policy Committee meeting at 1000 IST. Analysts expect the panel to maintain status quo on both the repo rate, at 6.50%, and policy stance at "withdrawal of accommodation", according to an Informist poll.

Traders are expecting the committee to change its stance to "neutral" from "withdrawal of accommodation", which may spur the 10-year benchmark yield to fall to fresh multi-year lows of around 6.80%. However, if the domestic rate-setting panel does not change the stance, it may trigger some selling in the market and the yield on the 10-year benchmark may rise to 6.92%, dealers said.

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 6.80-6.95% during the day.

India Gilts: Remain up; prices volatile before MPC meet outcome Thu

MUMBAI—1615 IST--Government bond prices remained higher on bets of the monetary policy stance easing at the outcome of the Monetary Policy Committee meeting on Thursday. Prices briefly gave up most gains, before rebounding back to the day's high towards the close of market hours. 

The Reserve Bank of India's rate-setting panel is expected to keep the repo rate unchanged at 6.50% and maintain the policy stance at "withdrawal of accommodation", according to an Informist poll of 30 analysts. Traders have been going back and forth over the past week over whether the stance would soften to "neutral". Currently, bond prices reflect a change in stance, even though both the most recent inflation print, and the outlook for CPI inflation in Oct-Mar, were above the RBI's 4% target.

"There is a lot of positive momentum in the market," a dealer at a state-owned bank said. "We were able to buy for some time earlier, but at these levels, I am more afraid of what will happen if it's a dull policy with no stance change. The market will sell off completely."

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 541.80 bln rupees, against 517.70 bln rupees at 1630 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.90%. (Aaryan Khanna)

India Gilts: Rise as OIS rates fall, MPC stance change bets intensify

MUMBAI--1330 IST--Prices of government bonds rose tracking a steep fall in overnight indexed swap rates, led by offshore traders receiving fixed rates, dealers said. Traders also picked up bonds, betting on the Reserve Bank of India easing monetary conditions after the Monetary Policy Committee's meeting outcome on Thursday.

The five-year swap rate fell to 6.09%, matching a 14-month low, from a high of 6.15% early in the day. Traders said overseas traders received fixed rates, aggressively betting on the MPC to change its stance to "neutral" from the current "withdrawal of accommodation". Last week, the US Federal Open Market Committee pointed to risks to its dual mandate of inflation and jobs, after stressing on only inflation over the last two years. Trade volumes in both gilts and swap rates surged.

"It is a binary policy outcome in that sense – either there will be a stance change, or there will be an OMO (open market operation sale)," a dealer at a private bank. "The global situation has turned definitely to easier monetary policy, and there's no reason for the RBI to avoid it."

 The MPC was already close to changing the stance, with two dissentions on the status quo vote in the previous policy decision, dealers said. The central bank had also let the surplus liquidity in the banking system rise to over 2.5 trln rupees, inconsistent with the "withdrawal of accommodation", without any significant durable measures to mop-up liquidity, they said.

On the other hand, there were risks that the RBI would prefer to retain its stance and clamp down on the liquidity surplus. Some sections of the market still fear that the central bank would announce a calendar for open market bond sale auctions of up to 1 trln rupees to mop-up surplus liquidity, dealers said. Domestic growth momentum was slowing only marginally, unlike in the US where the unemployment rate shot up to a near three-year high in July, they said. The RBI had already sold over 100 bln rupees in July through open market sales in the secondary market.

RBI Governor Shaktikanta Das has also repeatedly said in public comments in July that it was too soon to think about a stance change and a cut in interest rates. Regardless, with signs of the US economy weakening, and the European Central Bank already having enacted a rate cut in June, the conditions for a rate cut in India were approaching faster than the central bank may have guided for, dealers said. Several market participants had begun pricing in a 25-basis-point repo rate cut in India by December, after a stance change this week.

"I think the market will regain 6.85% (on the 10-year yield) before the policy (outcome at 1000 IST Thursday), the buying momentum is too strong. We'll see when the speech comes out which way it goes from there," a dealer at another private bank said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 339.95 bln rupees, against 248.60 bln rupees at 1330 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.85-6.90%. (Aaryan Khanna)

India Gilts: Steady on caution before MPC outcome Thu; trade volume dn

MUMBAI--1015 IST--Prices of government bonds were steady as traders remained on the sidelines ahead of the outcome of the Reserve Bank of India's Monetary Policy Committee's meeting, due Thursday, dealers said. Traders were optimistic that RBI officials would signal easier monetary policy conditions, which offset the impact of offshore cues in early trade.

Despite an overnight rise in the yield on the 10-year benchmark US Treasury note, bond prices did not fall as state-owned banks stepped up buying the 7.10%, 2034 bond as the yield on paper was considered lucrative at 6.88% yield, dealers said. The yield on the 10-year benchmark US Treasury note rose to 3.92% from 3.85% at the time the Indian market closed Tuesday. Comments from US Federal Reserve officials signalled there was no fear of an imminent recession in the world's largest economy, which would require aggressive rate cuts.

"Given the rise in US yields, the market should have fallen, but that didn't happen because of buying from PSU (state-owned) banks," a dealer at a state-owned bank said. "But the market will not see a major change from here because traders are not sure what will happen tomorrow (Thursday)."

The caution ahead of the event has impacted trade volume as most traders had already placed their bets on the outcome and there were no fresh triggers to change those views, dealers said. While the market remains clear that the repo rate will be kept unchanged at 6.50% on Thursday, a stance change continues to be a contentious issue, dealers said. The market is divided about whether the MPC will soften its stance to "neutral" from "withdrawal of accommodation", after introducing the phrase 14 meetings ago.

"There is still a 50-50% chance of a stance change," a dealer at a primary dealership said. "Many people are betting against a stance because our inflation is still not supportive of it." India's headline CPI inflation rose to a four-month high of 5.08% in June, according to the latest government data, against the RBI's 4% medium-term inflation target.

If the committee does not change its stance, the yield on the 10-year benchmark may rise to 6.92%. While if the committee changes the stance, then the yield on the 10-year benchmark may fall to 6.85%, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 113.60 bln rupees, against 133.25 bln rupees at 1030 IST on Tuesday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.92%. (Siddhi Chauhan)

India Gilts: Seen down on rise in US yields; MPC meet outcome awaited
 

MUMBAI – Prices of government bonds are seen opening lower today tracking an overnight rise in US Treasury yields, dealers said. During the day, losses may be limited as traders continue to bet on a change in stance or softer commentary by Reserve Bank of India officials at the Monetary Policy Committee.

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.86-6.92%, against 6.88% on Tuesday. After opening lower, traders expect bond prices to move in a narrow range throughout the day, dealers said. 

The yield on the 10-year benchmark US Treasury note rose to 3.91% today from 3.85% at the time the Indian market closed Tuesday. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors.

US yields rose as investors gained some confidence after comments from US Federal Reserve officials eased fears of a recession in the US, which had raised hopes of an aggressive US rate cut cycle beginning September. While speaking at an event in Hawaii on Monday, San Francisco Fed President Mary Daly accepted that the US economy was slowing, but denied it was falling from a cliff.

Earlier on Monday, Chicago Federal Reserve President Austan Goolsbee cautioned against too much signal from a global market sell-off. He said it stemmed in part from Bank of Japan's decision last week to raise rates. He said that jobs data for July did not indicate a recession, while noting that Fed policymakers must carefully monitor changes in the US economy to avoid being too restrictive with interest rates. 

The odds of a 50-basis-point rate cut by the US Federal Open Market Committee in September fell to 69.5% in Asian trade today, after rising to as much as 100% on Monday, according to the CME FedWatch tool.

On the domestic front, the market remains divided on the chance of a change in stance. While some traders are of the view that the MPC would change its stance to "neutral" from "withdrawal of accommodation" after 28 months, others expect the panel to remain status quo on both change in stance and rate cut. The latter segment believes so due to robust domestic growth and high food inflation.

The Reserve Bank of India's rate-setting panel is expected to keep the repo rate and the policy stance unchanged this week with inflation still running above the central bank's target and growth staying robust, according to an Informist poll of 30 analysts. India's headline CPI inflation in June rose to a four-month high of 5.08% in June, and the consensus from economists is that the central bank will keep its projections for growth and inflation unchanged. In 2024-25 (Apr-Mar), the RBI sees India's GDP growth at 7.2% and CPI inflation at 4.5%. (Siddhi Chauhan)

End
 

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

Edited by Aditya Sakorkar

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