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Informist, Wednesday, Dec. 4, 2024

By Srijita Bose

MUMBAI – Government bond prices ended sharply higher as hopes of a rate cut at the Reserve Bank of India's Monetary Policy Committee crystallised and traders wanted to head into the MPC meeting with fuller portfolios, dealers said. While several traders bet on the MPC to go ahead with a repo rate cut, others expected the RBI to introduce significant measures to ease liquidity conditions.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.74, or 6.68% yield, against INR 100.54, or 6.71% yield Tuesday. The benchmark yield ended at its lowest level since Feb. 14, 2022. 

"I think there is a 50-50 chance that the RBI will cut rates at this point, but you don't want to go light into the event because even if there is no rate cut there will surely be a cut in cash reserve ratio and that will definitely give a boost to the market further," a dealer at a state-owned bank said. "If the RBI cuts both the rates, I see the 10-year (6.79%, 2034 bond) rally another 125 paise."

A key positive for prices was that state-owned banks have avoided large gilt sales since Tuesday, ahead of the MPC meeting outcome. State-owned banks net sold gilts worth INR 370.53 billion between Nov. 27 and Monday, by far the largest net sellers in the secondary market, according to Clearing Corp. of India data. These sales have coincided with a rise in gilt prices after India's GDP for Jul-Sept grew at 5.4%, much lower than the RBI's projection, which stoked hopes of policy easing. Foreign investors and a domestic insurer also bought gilts, keeping prices up throughout the day, dealers said.

Banks paid their half-yearly premiums to the Deposit Insurance and Credit Guarantee Corp. on Friday, with traders estimating the total mop-up at INR 100 billion-INR 120 billion. The deposit insurer had spread out its corresponding purchases of liquid gilts between last week and this week, dealers said. The inflows from these institutions, foreign and domestic, helped the 10-year gilt yield break the crucial 6.70% mark early in the day.

"DICGC likely deployed about INR 50 billion in the market, so that was also a reason for prices rising," a dealer at a primary dealership said.

Expectations of easing liquidity conditions were also reflected in the lower cut-offs at the Treasury bills auction on Wednesday. The 91-day T-bill cut-off yield was set at 6.43%, the lowest level since Jan. 18, 2023, while 182-day T-bills cut-off was set at 6.54%, lowest level since Sept. 21, 2022. 

"Everyone is taking positions accordingly as the RBI could cut cash reserve ratio now. The lower T-bill cut-offs are also a reaction to that," a dealer at a private bank said. "Market expects a sharp steepening in the yield curve, and surely the short-end will benefit the most as risk-reward will be skewed towards you."

Traders also sold bonds at a profit as the 10-year benchmark yield hit its lowest in nearly 27 months. Though sales from state-owned banks eased, they were churning their portfolios. After covering short bets in the first half of the day, they picked up other sections of the market that were also sitting on aggressive profits and got exits on some illiquid stock, dealers said.

Some dealers also speculated that Das' tenure as RBI governor may not be extended due to the delay in the announcement, with his term scheduled to end on Tuesday. Das, the governor for the past six years, has been focused on curbing inflation and has said he will not consider cutting rates before headline CPI inflation aligns with the RBI's 4% target. A new person at the helm may be more favourable to cutting rates, dealers said. Rate cut hopes hinge on the MPC focusing on growth rather than inflation, with consumer prices rising the most in 14 months at 6.21% in October. News reports over the last two weeks have signalled that Das' term is likely to be extended. 

At the market open, the 7.10%, 2034 gilt's swung sharply likely on account of an erroneous trade by some market participants, dealers said. The bond's price rose to INR 103.32 from INR 102.38 on Tuesday, at a time when the rest of the market was flat.

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 904.20 billion, against INR 601.15 billion on Monday. Two trades worth INR 100 million were settled using the wholesale digital rupee pilot on Wednesday, same as Tuesday.

OUTLOOK

On Thursday, bond prices may open steady ahead of the MPC outcome Friday as dealers said they were well positioned for the RBI's expected measures to ease monetary policy. Traders may continue to pick up gilts despite the sharp rise in prices over the last few days, with a 25-bps rate cut or an open market purchase calendar the biggest potential positives for bonds.

Dealers expect foreign inflows to continue after the lower GDP print for Jul-Sept raised hopes of a rate cut by the MPC on Friday. Foreign banks tend to reduce their trading activity near the year-end as they close accounts for their balance sheets, but have been net buyers of gilts since last Friday.

Traders also await any news on the extension of RBI Governor Das' tenure. His term ends on Tuesday, and the announcement on either an extension of Das' term or appointment of a successor is expected this week. 

Any developments in West Asia and the Russia-Ukraine war may impact gilt prices at the open. The movement in the US yields and crude oil prices could also lend cues to bond prices. The yield on the 6.79%, 2034 bond is seen at 6.62-6.70% Thursday.

India Gilts: Remain up; FPIs, domestic insurer stock up before MPC outcome

MUMBAI--1410 IST--Prices of government bonds remained higher as foreign investors and a domestic insurer bought gilts ahead of the Reserve Bank of India's Monetary Policy Committee meeting outcome on Friday. Traders expected either the MPC to cut the repo rate by 25 basis points to 6.25% or the RBI to ease liquidity conditions, both of which are likely to lead to prices rising after Friday, dealers said.

The yield on the 10-year benchmark bond hit 6.6782%, its lowest since Feb. 16, 2022, as these expectations crystalised and traders wanted to head into the meeting with fuller portfolios, dealers said. A key positive for prices was that state-owned banks avoided large gilt sales ahead of the MPC meeting outcome. They churned their portfolios and covered some short bets, after a spate of profit booking until Monday, dealers said.

"The demand-supply dynamics in the market are keeping prices up so much, plus apart from foreign inflows, DICGC (Deposit Insurance and Credit Guarantee Corp.) is also in the market today," a dealer at a primary dealership said. "People are now holding their positions and are not selling aggressively as they have already booked so much profit since Friday (after lower-than-expected Jul-Sept GDP growth data shot up prices)."

With GDP growth at 5.4% in Jul-Sept against its 7.0% projection, the RBI was seen loosening monetary policy sooner rather than later, which had spurred a return of foreign investors, dealers said. If the MPC both cuts the repo rate and the RBI infuses liquidity through a cash reserve ratio cut, a view expressed by Kotak Mutual Fund earlier Wednesday, bond traders have a lot to gain, they said.

"Once the RBI cuts rates, I see short-term (bonds) rally by another 20 basis points at least, and the long-term (bonds) by nearly 15 bps," a dealer at a private bank said. "If there is an additional CRR cut too, then there will be a massive rally in the market."

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 679.20 billion, sharply up from INR 390.30 billion at 1430 IST on Tuesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.62-6.70%. (Srijita Bose)

India Gilts: Surge on bets MPC may cut repo rate Fri; PSU bks' sales subside

MUMBAI--1151 IST--Prices of government bonds were sharply up as traders bet on a 25-basis-point repo rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday. The three-day MPC meeting began Wednesday. Dealers said bond sales from state-owned banks subsided since Tuesday, which aided gilt prices. 

"The market was still quite light on bonds and if the MPC cuts rates then yields will fall like anything, so everyone's buying," a dealer at a private bank said. "Also, it's a big go-ahead that PSU (state-owned) banks were not selling yesterday (Tuesday)."

State-owned banks usually buy gilts cheaply when other market participants are on the selling side, and book profits when other segments of the market are buyers. According to data from the Clearing Corp. of India, state-owned banks sold gilts worth INR 370.53 billion between Nov. 27 and Monday. On Tuesday, data showed that state-owned banks turned into minuscule net buyers. Dealers said state-owned banks also wanted to hold on to some bets of softening policy after the large sales in the run-up to the outcome. RBI Governor Shaktikanta Das will present the monetary policy outcome on Friday.

Some dealers also speculated that Das' tenure as RBI governor may not be extended due to the delay in the announcement, especially close to the MPC meeting outcome. Das' term is scheduled to end on Tuesday. He has been the governor for six years. Das has been focused on curbing inflation and has said he will not consider cutting rates before the CPI inflation aligns with the RBI's 4% target. A new person at the helm may be more favourable to cutting rates, dealers said. Rate cut hopes hinge on the MPC focusing on growth rather than inflation, with consumer prices rising the most in 14 months at 6.21% in October. News reports over the last two weeks have signalled that Das' term is likely to be extended. The latest report by television channel ET Now on Tuesday said the notification for his extension is likely this week. 

The lower-than-view Jul-Sept GDP growth print in India last Friday spurred bets of a 25-bps rate cut this week. Foreign inflows likely buoyed prices as their holdings of gilts had lightened closer to the year-end, dealers said. Foreign banks tend to reduce their trading activity near the year-end as they close accounts for their balance sheets.

At the market open, the 7.10%, 2034 gilt's swung sharply likely on account of an erroneous trade by some market participants, dealers said. The bond's price rose to INR 103.32 from INR 102.38 on Tuesday, at a time when the rest of the market was flat. The error would be reported to the Clearing Corp. of India's Dispute Resolution Committee and the Fixed Income Money Market and Derivatives Association of India would likely announce a decision on the reversal of the trade by the end of the day, dealers said.   

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 508.40 billion, sharply up from INR 115.95 billion at 1130 IST on Tuesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.62-6.70%. (Cassandra Carvalho)

India Gilts: Seen steady before MPC outcome Fri; policy measures awaited

MUMBAI – Prices of government bonds are likely to open steady, as the three-day Monetary Policy Committee's meeting begins Wednesday. The slight rise in US Treasury yields after the jobs data may weigh on gilt prices at open, but traders' focus is on the MPC outcome on Friday, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.68-6.75%, against 6.71% on Tuesday. Traders expect prices to consolidate after the significant rise since the release of India's GDP data last week, dealers said.

India's GDP growth in Jul-Sept was 5.4%, against the Reserve Bank of India projection of 7.0%. This has fuelled hopes of the MPC cutting rates, though the most likely measure is a cut in the cash reserve ratio by up to 50 basis points to inject liquidity, dealers said. Other options that traders expect include longer-term variable rate repos or the purchase of gilts by the RBI through open market operations.

Even if there is no rate cut, traders look forward to the MPC's voting pattern to see whether a rate cut is certain in February. In October, newly-appointed external members Ram Singh, Saugata Bhattacharya and Nagesh Kumar attended their first MPC meet. Of the three, Kumar voted for a 25-bps cut, while the other members preferred a status quo. After the low Jul-Sept growth figure, traders hope that the MPC will change its focus to growth from inflation, dealers said.

Traders also await any news on the extension of RBI Governor Shaktikanta Das' tenure. His term ends on Dec. 10, and media reports Tuesday stated that an extension of his term is expected this week. Das has been holding the position of governor for six years, and an extension is seen as good news on grounds of policy continuity. On the other hand, some dealers said that considering Das' stance on controlling inflation, the market may welcome a new governor who is seen as more likely to cut rates. With the delay in announcing Das' extension, some dealers were of the view that he would be replaced as governor.

On the global front, the yield on the 10-year US Treasury yield rose to 4.23% at 0820 IST from 4.21% at Tuesday's Indian market close. US yields rose after US job openings in October came in higher than investors had anticipated. However, the reading did not have a significant impact on rate cut hopes in December in the US. An intraday move in US yields may lend direction to gilt prices as well, dealers said. (Cassandra Carvalho)

End

US$1 = INR XX.XX

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

Edited by Akul Nishant Akhoury

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