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Informist, Friday, Nov. 29, 2024

By Cassandra Carvalho and Srijita Bose

MUMBAI – Gilt yields tumbled after a sharply slower-than-expected GDP growth in the Jul-Sept quarter raised hopes of a rate cut by the Monetary Policy Committee next week, dealers said. The 10-year benchmark gilt yield fell the most since the presentation of the Interim Budget for 2024-25 (Apr-Mar), on Feb. 1.

The 6.79%, 2034 bond ended at INR 100.33, or 6.74% yield, against INR 99.89, or 6.80% yield, Thursday. The 7.10%, 2034 bond closed at INR 102.22, or 6.77% yield, against INR 101.81, or 6.83% yield, Thursday. Trade volumes doubled following the release of the GDP print at 1600 IST. 

India's GDP grew at a seven-quarter low of 5.4% in Jul-Sept against 8.1% a year ago. An Informist poll had estimated the Jul-Sept GDP at 6.5%, and even the most optimistic gilt traders had not expected a reading much below 6%. The Reserve Bank of India had estimated the GDP at 7%, while RBI staff estimated it at 6.7% last week.

"Even people who were not expecting a December rate cut (by the Monetary Policy Committee) are now buying on that view since no one expected the (GDP) data to be so poor," a dealer at a state-owned bank said.

RBI officials, including Governor Shaktikanta Das, have maintained that India's economic growth has been resilient in recent comments. With the sharp slowdown in growth – India's Apr-Jun GDP growth was 6.7% – the RBI's rate-setting panel may cut the policy rate repo of 6.50% by 25 basis points next week, dealers said. At the previous meeting in October, only one member of the six-member committee – external member Nagesh Kumar – had voted for a rate cut.

After the surprisingly low GDP numbers, some foreign portfolio investors covered short bets placed in early November, dealers said. According to data from the Clearing Corp of India, they bought gilts worth INR 25.24 billion via the fully accessible route as of 2000 IST on Friday. Foreign inflows have returned this week, after three weeks of FPI sales as global uncertainty weighed on emerging market debt.

Dealers said that foreign investors were unwinding trades they had initiated after Donald Trump's victory in the US presidential election, and said they may re-enter those trades only close to Trump's inauguration in January. Domestic traders had already begun unwinding their short sales in the run-up to the GDP print. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data for Friday showed trades worth INR 105.52 billion in the 7.10%, 2034 gilt, down by a third from Wednesday. For three weeks since Trump's election, the outstanding trades in the bond were above INR 150 billion.

Despite the foreign outflows this month, the market has overcome the recent correction in prices and rallied again, a dealer at a private bank said. "The market was very light, despite some short covering, no one expected such a low reading." This allowed a large section of the market to be on the right foot and take advantage of the rise in prices to book profit.

While some traders immediately realigned their bets towards a rate cut, others were still of the view the RBI's Monetary Policy Committee may avoid taking action based on a single quarter's growth reading. Still, they said the RBI was likely to infuse additional liquidity into the banking system either through a cash reserve ratio cut or by conducting open market operations. The cash reserve ratio is currently at 4.5% and could be cut by up to 50 basis points.

Before the GDP data, state-owned banks were trimming portfolios at a profit, while a large deposit insurer picked up gilts in light volumes, dealers said. Traders had expected volatility after the release, and trade volumes were not very large before 1600 IST despite the weekly gilt auction earlier in the day.

WEEKLY AUCTION

The government raised INR 300 billion through bonds on Friday, with the RBI setting cut-off prices on expected lines. Bonds gave up some gains after the results as RBI devolved INR 34.98 billion of the new 10-year green bond on primary dealers. This is the first devolvement of an auction in 21 months. Demand for green bonds remains tepid as the last two issuances of the bonds on May 31 and Aug 2 were also lacklustre. In the first, the RBI rejected all bids, while in the second offering, the government only accepted bids worth INR 16.97 billion against INR 60 billion notified. 

The fall in bond yields post the GDP data gave primary dealers an opportunity to get rid of the devolved stock at a profit. The 6.79%, 2034 sovereign green bond ended at INR 100.25.

Meanwhile, state-owned and private banks picked up the 7.02%, 2031 gilt at auction at levels they considered lucrative, with the seven-year gilt yielding more than the 10-year benchmark at the auction. The 7.34%, 2064 gilt was picked up primarily by pension funds and life insurers, with a state-owned life insurer also in the mix for the bond. Private life insurers also entered into bond forward-rate agreements for the 40-year gilt as the cost of entering the derivative transaction had fallen with the sharp fall in the five-year overnight indexed swap rate over the past week. Long-term bond yields were largely unchanged, making them lucrative, dealers said.

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 630 billion, against INR 355.65 billion Thursday. Volumes spiked in the last hour of trading after the release of the GDP data. No trades were settled using the wholesale digital rupee pilot on Friday, the same as Thursday.

OUTLOOK

The gilt market is shut on Saturdays. On Monday, bond prices are likely to open steady, dealers said. Traders expect bond prices to consolidate gains following India's GDP growth slowing sharply in Jul-Sept. The bond market's focus will be on the RBI's possible action at the MPC meeting next. The outcome of the meeting will be announced on Dec. 6.

Any escalation in the conflicts in West Asia and Russia-Ukraine may negatively impact gilt prices at the market opening. The movement of US yields and crude oil prices could also lend cues to bond prices.

The yield on the 6.79%, 2034 bond is seen at 6.71-6.77% Monday. The yield on the 7.10%, 2034 bond is seen at 6.74-6.80%.

India Gilts:Off highs as RBI devolves INR 34.98 bln of green bond at auction

MUMBAI--1509 IST--Prices of government bonds were off highs after the Reserve Bank of India devolved INR 34.98 billion of the new 10-year sovereign green bond on primary dealers at the weekly auction on Friday, dealers said. With the devolvement, the government raised the full notified amount of INR 300 billion, with the demand for other bonds in line with expectations.

The Reserve Bank of India set a coupon of 6.79% on the new 10-year sovereign green bond. Underwriters were unfazed by the devolvement, as the amount would be less than INR 2 billion per primary dealership. After being saddled with the green bond, primary dealers sold their stock of liquid securities to lighten their portfolio. Traders had expected the RBI would either reject all bids for the green bond – a thoroughly unpopular trading paper due to the government's demand for green premiums – or that it would be able to convince state-owned entities to pick up the entire INR 50 billion on offer. 

"We thought the auction (for the 10-year green bond) would either be cancelled or the RBI would hit nationalised (state-owned) banks. The devolvement shows the government is low on cash, the market estimates that the Treasury bill amounts (to be auctioned) will increase," a dealer at a state-owned bank said. Dealers said the RBI made calls to a few state-owned banks to place more aggressive bids on the green bond, with one state-owned bank confirming the nudge from the central bank.

As for the rest of the auction, the 7.02%, 2031 bond was picked up by foreign and domestic banks at the auction, largely for its lucrative yield, which surpassed the yield on the 10-year benchmark paper, dealers said. A large state-owned insurer's presence at the auction led to the cut-off on the 7.34%, 2064 bond being slightly better than expected. In the secondary market, state-owned banks trimmed portfolios at a profit. 

Traders who had room in their portfolio picked up bonds before India's GDP data for Jul-Sept due at 1600 IST. An Informist poll pegged India's September quarter GDP growth rate at 6.5%, though some traders are betting on an even lower print, which could spur bets on quicker or sharper rate cuts by the RBI's Monetary Policy Committee, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 231.60 billion, against INR 247.85 billion at 1430 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.85%, and that on the 7.10%, 2034 bond is seen at 6.78-6.88%. (Cassandra Carvalho)

India Gilts: Up on fall in US yields, traders await auction results

MUMBAI--1314 IST--Prices of government bonds were up due to an intraday fall in US Treasury yields. Traders awaited the results of the weekly gilt auction worth INR 300 billion and the release of India's Jul-Sept GDP data at 1600 IST. 

The government offered to sell INR 100 billion of 7.02%, 2031 bond, INR 50 billion of a new 10-year, 2034 green bond, and INR 150 billion of 7.34%, 2064 bond at the auction. Demand at the auction is expected to be firm with the seven-year paper being bid from state-owned banks as well as private banks, dealers said.

The Deposit Insurance and Credit Guarantee Corporation may bid to pick up this paper at the auction after banks made their half-yearly premium payments to them. The credit guarantor is expected to pick up a total of about INR 120 billion of gilts in both the primary and the secondary market by the end of next week, dealers said.

Interest in the sovereign green bond has picked up at this issuance as the Reserve Bank of India notified it under the fully accessible route, dealers said. The RBI will likely set a coupon on the bond either on a par with the regular 10-year gilt, or within 2 basis points lower. The government typically demands a 'greenium', or green premium, from investors due to the bond's impact on sustainability.

However, because the bonds are typically illiquid after their issuance, traders typically demand higher yields for the bond, which has led to the RBI rejecting bids. The government raised only INR 16.97 billion of their scheduled INR 120 billion in Apr-Sept from such bonds. The RBI Friday likely directed some banks to pick up the bond at auction to ensure it sails through, dealers said. One state-owned bank confirmed it was encouraged by the central bank to pick up the bond. 

"...I heard that the RBI called PSU (state-owned) and public-sector entities to bid at a lower premium, then the cut-off (coupon) could be set lower," a dealer at a primary dealership said. 

Demand for the 40-year paper is seen moderate with life insurers and pension funds bidding for the bond. While cash demand from insurers was likely muted, some traders also bid for the bond at a discount, dealers said. Insurers also bid for the bond through forward-rate agreements with banks, as the cost of entering the derivative transaction had fallen with the sharp fall in the five-year overnight indexed swap rate over the past week. Meanwhile, long-term bond yields were largely unchanged, making them lucrative, dealers said.

Meanwhile, the yield on the 10-year US Treasury note fell to 4.22% in European market hours from 4.26% at settlement Wednesday. US markets were closed on Thursday for Thanskgiving. This pushed up bond prices after the auction bidding ended.

"The intraday rise is because US yields fell, some people are also building some positions before the GDP as expectation is on the softer side only and people are looking to make profits since the data is coming within market hours for the first time," a dealer at a private bank said.

GDP data was earlier released at 1730 IST. The government changed the time for CPI and GDP data releases to be within market hours earlier this month. Volatility after the CPI print was limited as traders had a unidirectional view of high inflation, dealers said. On Friday, the volatility may be as traders have divergent views on the growth print, and it is likely to be a determinant on the views on India's rate cut cycle, they said. 

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 141.60 billion, against 109.30 INR billion at 1330 IST Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.85%, and that on the 7.10%, 2034 bond is seen at 6.78-6.88%. (Srijita Bose)

India Gilts: Steady on caution ahead of weekly gilt auction, India GDP data

MUMBAI--0956 IST--Prices of government bonds were steady on caution ahead of the INR 300-billion weekly gilt auction at 1030-1130 IST and India's GDP data for Jul-Sept at 1600 IST, dealers said. The government will sell INR 100 billion of the 7.02%, 2031 gilt, INR 50 billion of a new 10-year sovereign green bond, and INR 150 billion of the 7.34%, 2064 gilt.

Demand at the auction is seen firm, with state-owned banks and private banks expected to bid for the 7.02%, 2031 bond for their asset-liability management purposes, dealers said. Foreign portfolio investors may also pick up the seven-year benchmark bond as it offers better yield returns compared to the 6.79%, 2034 bond, dealers said. Currently, the yield on the 7.02%, 2031 bond is at 6.81%.

The 7.34%, 2064 gilt is expected to see demand from the usual long-term investors, that is, pension funds and insurance companies, dealers said.

However, traders are unsure about demand for the new 2034 sovereign green bond, dealers said. Some dealers expect the Reserve Bank of India to reject bids for the new 2034 sovereign green bond at the auction due to lack of interest in the paper, while a few expect its auction to sail through due to a smaller size, dealers said. Demand for these bonds may be slightly more than the previous tranche offered in Apr-Sept as they are eligible under the fully accessible route, dealers said.

"The demand at the auctions seems fair enough, although we will have to see other than PSUs (state-owned banks) who else are interested in picking this bond," a dealer at a state-owned bank said. "The demand depends actually on whether the RBI wants to take it on greenium or if it will be okay taking it around the levels on new 10-year benchmark." Green bonds are typically priced at lower yields than regular securities, and the difference between the yields is known as 'greenium'.

Traders may remain cautious ahead of India's GDP data for the quarter ended September, dealers said. Traders widely expect the GDP growth to fall below 6.7% projected by RBI staff last week and the central bank's estimate of 7%. A poll of 21 economists by Informist sees the Jul-Sept GDP at 6.5%. The data will be a key indicator for traders to gauge India's pace and quantum of interest rate cuts.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 21.70 billion, against 34.25 INR billion at 0930 IST Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.85%, and that on the 7.10%, 2034 bond is seen at 6.78-6.88%. (Siddhi Chauhan)

India Gilts: Seen steady before bond auction, India GDP data

MUMBAI – Prices of government bonds are seen steady before the weekly gilt auction at 1030-1130 IST and the release of India's GDP data at 1600 IST, dealers said. Gilt prices are expected to be volatile in the last hour of trade as the much-awaited GDP print is seen as a key guidance on India's pace of rate cuts.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.75-6.85%, against 6.80% on Thursday. The yield on the 7.10%, 2034 bond is seen at 6.78-6.88%, against 6.83% Thursday.

Traders widely expected India's GDP growth to fall below 6.7% projected by RBI staff last week and the official central bank estimate of 7%. An Informist poll of 21 economists estimated the Jul-Sept GDP to have fallen to 6.5%. The data will be a key indicator for traders to gauge India's pace and quantum of interest rate cuts. Though the Monetary Policy Committee is expected to cut rates in February, some traders still hold out hopes of a December rate cut if the data comes near 6%. 

Traders will also gauge the appetite for gilts at the weekly debt sale. The government will sell INR 100 billion of the 7.02%, 2031 gilt, INR 50 billion of a new 10-year sovereign green bond, and INR 150 billion of the 7.34%, 2064 gilt. After last week's auction showed poor demand, demand for the fresh supply is likely to be better this week as foreign portfolio investors have turned buyers, dealers said.

The seven-year paper will be the likely target of domestic banks, as it suits their asset-liability management. The paper is likely to see some interest from foreign investors as well due to its yield being higher than the 10-year benchmark, dealers said. For the new 10-year sovereign green bond, some dealers expect the RBI to reject bids at the auction due to lack of interest in the paper. However, the majority said the RBI may look to persuade state-owned entities to pick up the bond as the government's cash balance has shrunk. Moreover, the demand for these bonds may be slightly more than the previous tranche offered in Apr-Sept as these are eligible under the fully accessible route, dealers said. (Srijita Bose)

End

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

Edited by Saji George Titus

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