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Informist, Monday, Aug 12, 2024

By Aaryan Khanna

MUMBAI – Government bond prices ended little changed today as traders avoided large bets ahead of India's CPI inflation for July, dealers said. The data was scheduled to be released at 1730 IST.

The 10-year benchmark 7.10%, 2034 bond closed at 101.52 rupees, or 6.88% yield, against 101.51 rupees, or 6.88% yield, on Friday.

India's headline CPI inflation for July came in at 3.54%, lower than expected. A poll by Informist saw the CPI inflation below the Reserve Bank of India's medium-term target of 4% for the first time in nearly five years, mainly on account of a statistical effect of a high base. According to the median of estimates of 15 economists, CPI inflation in July was seen falling to a 59-month low of 3.7% from 5.08% in June.

The base effect was cited by several traders across the market as a sign of comfort, which would keep headline inflation in check. Even a print around 4% would not be a discomfort to the market, after the RBI projected headline CPI inflation to average 4.4% in Jul-Sep, an upward revision of 60 basis points. Both July and August enjoy the statistical effect of a high base, which will likely keep the headline inflation print number low, dealers said.

Despite the certainty, traders wanted to let the print go past before taking any large bets. Some traders were of the view that the central bank was overestimating both inflation and growth, and this would be a good sign to gauge the accuracy of the RBI's projections, only a week after they were revised last week, dealers said.

"The CPI print is not going to be a gamechanger," a dealer at state-owned bank said. "The market knows very well what it will be like, and I don't think it will be able to break the 10-year yield out of the 6.85-6.90% band."

In addition to high food inflation, which pulled up India's CPI inflation in June to a four-month high of 5.08%, core inflation is also seen rising in July. A rise in cellular tariffs by all three major service providers by as much as 27% in early July is likely to push up inflation excluding food and fuel, dealers said. India's core CPI inflation rose to 3.4% in July from 3.1% the previous month.

With the RBI's quarterly projection, dealers fear that the inflation prints until September may be on an upward trajectory as the statistical effect of a high base wears off. This reduces the likelihood that the Monetary Policy Committee will be ready to soften its "withdrawal of accommodation" stance even at the October policy review, dealers said. The positive base effect falls off in September, and Oct-Dec inflation is seen at 4.7%, well above the RBI's target. 

Gilts rose early in the day as traders took bets on a softer inflation print, but a rise in US Treasury yields after the European market opened at 1230 IST weighed on prices, dealers said. The yield on the 10-year benchmark US Treasury note rose to as high as 3.97% during the day from 3.94% at the end of Indian market hours on Friday.

Regardless, foreign portfolio investors continued to pick up India's bonds in small amounts, due to the inclusion of government bonds in JP Morgan Government Bond Index – Emerging Markets, dealers said. The yield differential between the 10-year US and India bond yield, at around 280 bps, was considered lucrative by foreign investors even with the uncertainty over the rate trajectory in the US.

In addition to the India data, traders also looked ahead to key economic data on growth and inflation in the US. That was likely to lend a greater degree of volatility to the domestic market than India's inflation data, dealers said. Traders continued to participate in a global debate on whether the world's largest economy would fall into a recession – a 'hard landing' from tightened monetary conditions – or 'soft landing', with inflation easing back to the US Federal Reserve's 2% target without a sharp slowdown in growth.

Over the past week, investors' fears of a recession in the US have eased, and moved to more of a gradual weakening in the economy, dealers said. After falling sharply two weeks ago to under 3.70%, the yield on the 10-year Treasury note has risen to nearly 4%. Purchases of fully accessible route bonds by foreign portfolio investors slumped to 21.25 bln rupees between Aug 5-9, against 90.89 bln rupees in the week ended Aug 2.

"The interest rate view changes also instantly, which we saw after the NFP (non-farm payrolls) data," a dealer at a primary dealership. "I have gotten out of all of my 'hard landing' positions, but putting in trades for a 'soft landing' is still a work in progress."

With that, traders looked elsewhere for cues to trade. Last week, RBI data showed that the central bank sold 15.70 bln rupees worth of bonds in the secondary market in the week ended Aug 2. The pace of these sales had slowed from over 100 bln rupees in three weeks in July. The slowdown in the selling momentum was slightly positive, but traders expected the bond sales to continue, dealers said.

Short-term bonds are expected to be out of favour in the near-term as the surplus liquidity that the banking system has enjoyed since the beginning of July has begun to drain out, dealers said. Over the next two weeks, the RBI's persistent foreign exchange activity and goods and services tax outflows may pull down banking system liquidity to near neutral, from a surplus of 1.46 trln rupees on Friday. Consequently, overnight money market rates may also move to the marginal standing facility rate of 6.75%, against the 6.50% consistently seen over the past month, dealers said.

Long-term bond prices also ended little changed and saw limited trades despite the expectation of upcoming purchases from Life Insurance Corp of India, dealers said. India's largest life insurer on Thursday said it was in talks with banks to execute bond forward-rate agreements in the near-term. Bonds maturing in 30-50 years are likely to be the recipient of large purchases by LIC, which managed assets worth 53.59 trln rupees as of Jun 30, dealers said.

According to data on the RBI's Negotiated Dealing System–Order Matching platform, the turnover today was 237.55 bln rupees, lower than 399.70 bln rupees on Friday. There were two trades worth 100 mln rupees carried out using the wholesale digital rupee pilot today, the same as the last three days.

OUTLOOK

On Tuesday, bond prices may open slightly higher as India's CPI inflation was lower than expected, dealers said. Data released after market hours showed the CPI inflation fell to 3.54% in July from 5.08% in June. Core inflation rose to 3.4% in July from 3.1% the previous month.

With the July CPI inflation print at a 59-month-low, headline inflation in the September quarter may fall below the central bank's estimates. This could prompt a quicker easing of policy rates than earlier expected, dealers said. The RBI had raised its CPI inflation projection for Jul-Sep by 60 bps to 4.40% at last week's monetary policy review.

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 6.83-6.90% during the day.

India Gilts: In thin band; volumes low before India CPI post mkt hours

MUMBAI--1625 IST--Government bond prices remained in a thin band after giving up early gains. Trade volumes were muted as traders looked ahead to India's headline CPI inflation print for July, scheduled at 1730 IST, dealers said.

Traders were of the view that India's CPI print would have little impact on gilt prices, but were not keen to place large bets as they lacked other significant cues, dealers said. An Informist poll showed that the CPI inflation had fallen to 3.7% in July from 5.08% in June, dropping below the Reserve Bank of India's medium-term target of 4% for the first time since September 2019.

The 10-year yield was likely to move in a narrow band, regardless of whether the print would be 3.40-4.00%, dealers said. This was because neither extreme would suggest India's Monetary Policy Committee would cut rates in a hurry, after last week's policy review which showed that the six-member panel was still wary of inflation, they said.

With that, traders looked elsewhere for cues to trade. Last week, RBI data showed that the central bank sold 15.70 bln rupees worth of bonds in the secondary market in the week ended Aug 2. The pace of these sales had slowed from over 100 bln rupees in three weeks in July.  

"On the margin, it is a positive that they have not sold as much," a dealer at a private bank said. "They seem to be selling with some maturity, there doesn't seem to be a sharp pushback or a yield signal that they want to send every week."

Meanwhile, long-term bond prices were slightly higher, but saw limited trades despite large expected bond purchases from Life Insurance Corp of India, dealers said. India's largest life insurer said on Thursday it was in talks with banks to execute bond forward-rate agreements in the near-term. Bonds maturing in 30-50 years are likely to be the recipient of large purchases by LIC, which manages assets worth 53.59 trln rupees as of Jun 30.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 193.40 bln rupees, against 339.60 bln rupees at 1630 IST on Friday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%. (Aaryan Khanna)

India Gilts: Off highs as US ylds inch up; India Jul CPI data awaited

MUMBAI--1345 IST--Government bonds were off highs due to a slight rise in US Treasury yields during the day. Traders were cautious in placing aggressive bets ahead of the release of India's CPI inflation print for July, scheduled at 1730 IST, dealers said.

The CPI print was in focus after the Reserve Bank of India upped its inflation projections for Jul-Sep by 60 basis points to 4.4% at last week's monetary policy review. Headline CPI inflation is seen at 3.7%, according to the median of an Informist poll of 15 economists. Bond traders' views on the data were divided – while some picked up gilts on the hope that inflation would ease to 3.5%, others were prepared for a 4% inflation print as well, dealers said.

In addition to high food inflation, which pulled up India's CPI inflation in June to a four-month high of 5.08%, core inflation is also seen rising this month. A rise in cellular tariffs by all three major service providers by as much as 27% is likely to push up inflation excluding food and fuel, dealers said. With the RBI's quarterly projection, dealers fear that the inflation prints until September may be on an upward trajectory as the statistical effect of a high base wears off. This reduces the likelihood that the Monetary Policy Committee will be ready to soften its "withdrawal of accommodation" stance even at the October policy review, dealers said.

"In a soft landing scenario (in the US), the RBI would not have the room to cut by even 50-60 basis points," a dealer at a foreign bank said. "Currently, the pricing in the short-end of the curve is too aggressive."

Over the past week, investors' fears of a recession in the US have eased, and moved to more of a gradual weakening in the economy, dealers said. After falling sharply two weeks ago to under 3.70%, the yield on the 10-year Treasury note has risen to near 4%. Purchases of fully accessible route bonds by foreign portfolio investors slumped to 21.25 bln rupees between Aug 5-9, against 90.89 bln rupees in the week ended Aug 2.

Short-term bonds are expected to be out of favour in the near-term as the surplus liquidity that the banking system has enjoyed since the beginning of July has begun to drain out, dealers said. Over the next two weeks, the RBI's persistent foreign exchange activity and goods and services tax outflows may pull down banking system liquidity to near neutral, from a surplus of 1.46 trln rupees on Friday. Consequently, overnight money market rates may also move to the marginal standing facility rate of 6.75%, against the 6.50% consistently seen over the past month, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 127.75 bln rupees, against 168.35 bln rupees at 1330 IST on Friday. For the rest of the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%. (Aaryan Khanna)

India Gilts: Up as traders bet on lower-than-view India Jul CPI print

MUMBAI--1020 IST--Prices of government bonds rose as traders picked up bonds on the view that CPI data for July would be lower-than-expected, dealers said. On the global front, a slight fall in US Treasury yields also aided gilt prices.

India's CPI inflation data will be released by the National Statistical Office at 1730 IST. According to a poll of 15 economists by Informist, India's headline CPI inflation is seen falling to 3.7% from 5.08% in June, according to an Informist poll. This would be the first time headline inflation is below the Reserve Bank of India's medium-term 4% target since September 2019. Some market participants expect the domestic CPI print to fall to as low as 3.4% in July, dealers said.

"Traders are building their positions on the view that CPI data will come lower than what the market had expected due to higher base effect," a dealer at a private bank said. "The current levels may sustain because we do not have any negative cues that may impact the rally, but the volumes won't be that much." Headline inflation had risen to a 15-month-high of 7.44% in July last year.

Some traders may avoid placing large bets, keeping the day's volume low. The rise in prices was limited as state-owned banks sold their bonds at a profit, dealers said.

The 10-year benchmark yield may fall to 6.85% if CPI inflation comes in lower than consensus, dealers said. If inflation for the previous month comes in higher than the market's expectation, the yield on the 7.10%, 2034 bond may rise to 6.90%. The hit may be limited on strong appetite for bonds, as well as the RBI guiding for higher inflation in Jul-Sep. The central bank's projections last week showed they expect headline CPI inflation to average 4.4% in the current quarter. 

Separately, the yield on the 10-year benchmark US Treasury note fell to 3.94% today from 3.96% at the time the Indian market closed Friday. According to the CME FedWatch tool, traders are currently pricing in a 51% probability of a 50 basis point cut, with the remainder expecting a 25-basis-point rate cut.

Long-term bonds rose in thin trade after Life Insurance Corp of India said on Thursday it would enter into bond forward-rate agreement contracts with banks. This would spur demand for securities that the life insurer uses to match its liabilities, such as gilts maturing in 30-50 years. India's largest life insurer was speculated to have demanded a large chunk of the 7.34%, 2064 gilt at the weekly gilt auction on Friday, dealers said.

According to data on the RBI's Negotiated Dealing System--Order Matching platform--the market-wide turnover was 37.35 bln rupees, against 28.55 bln rupees at 0930 IST on Friday. During the day, the yield on the 10-year benchmark, 7.10%, 2034 bond is seen at 6.86-6.90%. (Siddhi Chauhan)

India Gilts: Seen steady on caution ahead India Jul CPI data

MUMBAI – Prices of government bonds are seen opening steady on caution ahead of the India CPI inflation data due post market hours today, dealers said. However, a slight fall in US Treasury yields may aid gilt prices, dealers said. 

The yield on the 10-year benchmark 7.10%, 2034 bond is seen at 6.86-6.91%, against 6.88% on Friday.

Throughout the day, traders may refrain from placing aggressive bets on caution ahead of India's CPI data for July. India's headline CPI inflation is seen falling to 3.7% from 5.08% in June, according to an Informist poll. This would be the first time headline inflation is below the RBI's medium-term 4% target since November 2019. Traders are prepared for a higher CPI inflation print after the central bank raised its headline Jul-Sep CPI projection by 60 bps to 4.4% at the monetary policy review on Thursday.

If inflation for the previous month comes in higher than the market's expectation, the yield on the 7.10%, 2034 bond is seen rising to 6.90%. However, if it falls, the yields may fall to 6.85%, dealers said. 

Traders also look forward to US CPI data that is scheduled on Wednesday. The data for the month of July will provide clarity on the chances of rate-cuts in the world's largest economy. The Federal Reserve is expected to cut rates at its next policy meeting in September, but traders are contemplating whether a 25 or 50 basis point reduction is more likely. According to CME FedWatch Tool, traders are currently pricing in a 51% probability of a 50 basis point cut, and 49% odds of a 25 basis point reduction.

During the day, a slight fall in US yields may also aid gilt prices, dealers said. The yield on the 10-year benchmark US Treasury note fell to 3.94% today from 3.96% at the time the Indian market closed Friday. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors. (Siddhi Chauhan)

End

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

Edited by Ashish Shirke

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