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Informist, Friday, Dec. 6, 2024

By Srijita Bose

MUMBAI – Government bond prices slumped after the Reserve Bank of India's Monetary Policy Committee disappointed traders by keeping the policy repo rate unchanged at 6.50%. This led to poorer-than-expected demand at the auction for the 6.92%, 2039 gilt, dealers said. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.31, or 6.74% yield, against INR 100.77, or 6.68% yield Thursday. Prices fell after traders, who had bet on a 25-basis-point repo rate cut, sold gilts. Gilt prices fell further after the result of the auction.

Rate cut bets had set in after India's Jul-Sept GDP growth slumped to 5.4%, against the RBI's estimate of 7.0%. The optimism on the growth outlook by RBI Governor Shaktikanta Das also did not bode well for repo rate cuts even at the next MPC meeting in February, dealers said.

"Some people were expecting a cut in the repo rate, but most of the market was more disappointed as the MPC still remained focussed on inflation, even after continuous warnings of growth slowing down," a dealer at a private bank said.

While the GDP growth forecast was cut sharply to 6.6% for 2024-25 (Apr-Mar) from 7.2% earlier, dealers took note of the RBI also pushing up its CPI inflation projections for each of the next three quarters, as Das still remained committed to bringing the headline inflation down. Even as the consensus view remained a 25-basis-point repo rate cut in February after the cash reserve ratio cut, traders were unsure about the future action on rate cuts. 

"No clear view can be made on whether there will be a February rate cut at this point," the dealer said. "The cut in cash reserve ratio will also be phased, which in a way is a good thing and mostly expected."

The RBI cut the CRR to 4.0% of banks' net demand and time liabilities, after hiking it to 4.5% when it began tightening monetary policy in 2022. RBI expects the cut to release INR 1.16 trillion of liquidity into the banking system, which may aid short-term gilts and limit the rise in the cut-off yields on Treasury bills at next week's auction. While some traders said that the move showed the RBI's willingness to act further towards easing monetary policy, others said it only mitigated the heavy losses the market sustained. Easing liquidity conditions was the base case for many traders, and kept the 10-year yield below the crucial 6.75% mark, dealers said.

"FPIs were probably selling today because of the NFP (non-farm payrolls) data, plus no one really wanted to hold their positions after the auction as it really showed poor demand. But PSU banks who were net sellers for so long, for them buying the (6.79%, 2034 bond) at 6.74% level would be profitable since they have space as well," a dealer at a state-owned bank said. 

Prices hit new lows during the day after demand for the 6.92%, 2039 gilt at the weekly gilt auction was poorer than expected. Most sections of the market bid for the paper at a sizeable discount, with primary dealerships picking the paper as part of their mandatory bidding requirements, dealers said. Demand for the new 2027 paper was along expected lines as traders picked up the gilt after the RBI cut the CRR, with additional liquidity keeping the demand for the short-term bond intact. The RBI set a coupon of 6.64% on the three-year paper. Demand for the 7.09%, 2054 paper was seen from life insurance companies as usual, while some traders also picked up the bond on the expectation that the central bank may cut rates in February, dealers said.

The focus only shifted to the US non-farm payrolls data after the domestic policy decision, and traders had not had an opportunity to prepare their portfolios for it earlier in the week, dealers said. State-owned banks may be picking up bonds in both the secondary market and at the auction to replenish their portfolios, after selling gilts worth over INR 410 billion since Nov. 28, according to Clearing Corp. of India data.

Before the policy outcome, volumes were muted as traders were in a watchful mode until the governor's statement at 1000 IST. As Das spoke of the recent slowdown in growth, but before he announced the MPC decision, gilt prices zoomed to the day's high. The 10-year benchmark gilt yield briefly hit 6.65%, its lowest in 31 months, before rising 10 bps by the end of the day.

According to the RBI's Negotiated Dealing System-Order Matching platform, the market turnover was INR 863.20 billion, against INR 500.60 billion on Thursday. No trades were settled using the wholesale digital rupee pilot on Friday, same as Thursday.

OUTLOOK

The gilt market is shut on Saturdays. On Monday, bond prices are likely to take cues from the movement of US Treasury yields after the release of the US non-farm payrolls data, due post market hours Friday, dealers said. 

After Friday's fall in prices due to the MPC outcome, dealers expect foreign investors to sell gilts more next week. 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 open. The yield on the 6.79%, 2034 bond is seen at 6.72-6.80% Monday.

India Gilts: Fall more on poor demand for 6.92%, 2039 bond at auction

MUMBAI--1630 IST--Prices of government bonds fell more on poor demand for the 6.92%, 2039 gilt at Friday's auction, dealers said. Prices were also sharply down earlier after the Reserve Bank of India's Monetary Policy Committee kept the repo rate unchanged at 6.50%. Some traders had expected a cut of 25 basis points in the repo rate.

Primary dealerships picked up the 2039 paper as part of mandatory requirements, with other sections of the market only bidding for the paper at a steep discount, dealers said. Demand for the new 2027 paper was along expected lines as traders picked up the gilt after the RBI cut the cash reserve ratio to 4.00% of net demand and time liabilities of banks, with additional liquidity helping to spur demand for shorter-tenure bonds. The RBI set a coupon of 6.64% on the three-year paper. Demand for the 7.09%, 2054 paper was seen from life insurance companies as usual, while some traders also picked up the bond on the expectation that the central bank may cut rates in February, dealers said.

"The market was expecting demand to be lower for the 15-year paper, but there was a much longer tail and a poor bid-cover ratio of only two times, which is why the market tanked," a dealer at a private bank said. "People were already disappointed with the policy, plus the auction shows that going forward also there could be some downward pressure on the market. People are not willing to go long now, especially before the non-farm payrolls data from the US."

Primary dealers, private banks, and foreign banks were likely to have been selling gilts after the auction on caution before the US non-farm payrolls data due at 1900 IST. The focus only shifted to the US non-farm payrolls data after the domestic policy decision, and traders had not had an opportunity to prepare their portfolios for it earlier in the week, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 806.15 billion, up sharply from INR 398.00 billion at 1630 IST Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.68-6.78%.  (Srijita Bose)

India Gilts: Remain sharply down; demand for fresh supply at auction moderate

MUMBAI--1407 IST--Prices of government bonds remained sharply down after the outcome of the Reserve Bank of India's Monetary Policy Committee meeting left traders disappointed, with no repo rate cut, dealers said. Demand for fresh supply of bonds at the INR-300-billion auction was moderate, with traders placing bids at a discount to secondary market prices, they said.

The RBI cut the cash reserve ratio for banks to 4.00% of their net demand and time liabilities, which was the base case for most of the market. However, RBI Governor Shaktikanta Das was seen to be staunchly focused on bringing headline CPI inflation down to the central bank's 4% target, rather than shifting focus to supporting growth, which fell to a shocking 5.4% in Jul-Sept from the RBI's forecast of 7%.

"Going forward into the second half of this year and the next year, the MPC assessed the growth outlook to be resilient, but warranting close monitoring," Das said.

The optimism on the growth outlook by the central bank chief did not bode well for repo rate cuts even at the next MPC meeting in February, dealers said. While the growth forecast was cut sharply to 6.6% for 2024-25 (Apr-Mar) from 7.2% earlier, dealers took note of the RBI also pushing up its CPI inflation projections for each of the next three quarters. It sees headline inflation hitting the 4% aim only by Jul-Sept 2025. This led to divided opinion on rate cuts, even as the consensus view remained a 25-basis-point repo rate cut im February after the CRR cut.

"I think Das is just buying time for inflation to hit the target range," a trader at a primary dealership said. "I think they (the rate-setting panel) will cut rates in February."

Trade volumes jumped during the governor's statement, and subsequently the market was volatile as traders assessed Das's comments. A fresh round of selling, likely from foreign portfolio investors, has dragged gilt prices near the day's low, dealers said. Foreign investors were also cautious ahead of the release of the US November non-farm payrolls data after Indian market hours, and trimmed their holdings of emerging market securities like India's bonds. However, state-owned banks may be picking up bonds in both the secondary market and at the auction to replenish their portfolios, after being top net sellers earlier in the week.

"The market steadied fast after the initial volatility, as the CRR cut was already priced in," a dealer with a state-owned bank said. "PSUs were selling during the early trade, but towards the end (of trade), they will likely be the net buyers."

At the auction, dealers said demand was moderate as gilt prices are considered expensive by some after the rise in prices since Nov. 29, with the RBI's limited measures on liquidity, and no repo rate cut. The government offered INR 70 billion of a new 2027 gilt, INR 130 billion of the 6.92%, 2039 gilt, and INR 100 billion of the 7.09%, 2054 gilt at 1230-1330 IST. The lack of aggressive bids was reflected in the underwriting cut-off prices, dealers said. The underwriting fees were set at 0.08 paise, 0.25 paise, and 0.27 paise, respectively, with the latter two the highest prices demanded by primary dealers since May.

For the 2027 paper, the CRR cut will likely help buoy demand despite the lack of a rate cut. Moreover, banks may pick up the three-year bonds to match their liabilities, and life insurers and pension funds may do the same with the 2054 bond. The demand for the 2039 bond could be lacklustre as the bond does not have an investor directly seeking it for asset-liability management, leaving the bond to traders, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 5,930.10 billion, up sharply from INR 266.70 billion at 1430 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.68-6.78%.  (Cassandra Carvalho)

India Gilts: Sharply down as MPC keeps repo rate unchanged at 6.5%

MUMBAI--1128 IST--Prices of government bonds were sharply lower after the Reserve Bank of India's Monetary Policy kept policy repo rate unchanged at 6.50% and continued with its "neutral" stance, dealers said. Bonds briefly recovered some losses after the RBI reduced the cash reserve ratio to 4.0% from 4.5% as it sees liquidity in the banking system tightening in upcoming months, dealers said. However, prices again fell back towards the day's lows as the much-anticipated cut in CRR was already factored in.

Traders were disappointed that RBI Governor Shaktikanta Das' statement focussed on inflation and price stability, as against market expectations that the central bank would change tack to focus on growth. Traders said that the cut in CRR, though welcome and expected, was not enough as the market had hoped for some cues on future rate cuts from the MPC. " I am still pricing in a 50% chance of a rate cut in February," a dealer at a state-owned bank said.

"The policy statement doesn't look dovish and the chances of a February cut has not increased, which the market was expecting. But the cut in CRR is also a show that the MPC is ready to act more if the growth indicators remain poor in the upcoming months," a dealer at a private bank said. "Most traders were already prepared for the liquidity easing, but people are a little worried as the statement was still focussed on inflation rather than shifting to growth."

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 463.90 billion, against INR 148.85 billion at 1130 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.68-6.78%.  (Srijita Bose)

India Gilts: Steady on caution ahead of MPC outcome, volumes muted

MUMBAI--0937 IST--Prices of government bonds opened steady as traders were cautious ahead of the Reserve Bank of India's Monetary Policy Committee meeting outcome at 1000 IST, dealers said. 

"I'm on the long (on bonds) side, but some PSUs have booked profit, but right now all traders are cautious," a dealer at a state-owned bank said. State-owned banks were the largest net sellers since Monday, as per data from Clearing Corp. of India. However, closer to the MPC meeting outcome, dealers said they reduced their sales and instead stocked up on bonds on expectations of softening policy. 

Volumes were muted as traders were in a "wait-and-watch" mode until the MPC outcome provided any cues on easing liquidity or interest rate cuts. Some traders expect the RBI governor to announce a 25-basis-point cut in the policy repo rate to 6.25%, which is likely to pull down the 10-year gilt yield to 6.65%, dealers said. Some liquidity injection measures by the RBI are also priced in after India's GDP growth fell to a seven-quarter low of 5.4% in Jul-Sept, well below the central bank's 7% forecast and the consensus market view of 6.5%.

The expected measures include a cash reserve ratio cut of up to 50 bps from the current 4.50%. Other liquidity-supporting measures by the RBI are also expected, in the form of longer-tenure variable rate repos, or purchase of gilts through open market operations.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 50.00 billion, against INR 55.10 billion at 0930 IST on Thursday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.60-6.80%.  (Cassandra Carvalho)

India Gilts: Seen steady before MPC outcome 1000 IST; volatility likely after

MUMBAI – Prices of government bonds are likely to open steady ahead of the outcome of the Reserve Bank of India's Monetary Policy Committee meeting, dealers said. The three-day meeting began Wednesday. Its outcome will be presented by RBI Governor Shaktikanta Das at 1000 IST. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.60-6.80%, against 6.68% on Thursday. Bond prices are likely to be volatile during and after the governor's statement, and traders may avoid large bets before 1000 IST as they had placed bets on the outcome earlier this week, dealers said. "How much more can prices go up remains to be seen if there's a dovish outcome. I think we will all be more cautious in our (trading) decisions today (Friday)," a dealer at a private bank said.

Some traders are confident of a 25-basis-point cut in the policy repo rate to 6.25%, which is likely to pull down the 10-year gilt yield to 6.65%, dealers said. Some liquidity injection measures by the RBI are also priced in after India's GDP growth fell to a seven-quarter low of 5.4% in Jul-Sept, well below the central bank's 7% forecast and the consensus market view of 6.5%.

Dealers said measures to infuse liquidity will be the first step to revive growth, as rate cuts are unlikely with the latest CPI inflation print above the RBI's 2-6% comfort band. The expected measures include a cash reserve ratio cut of up to 50 bps from the current 4.50%. Other liquidity-supporting measures by the RBI are also expected, in the form of longer-tenure variable rate repos, or purchase of gilts through open market operations. The latter option is less likely, as it would skew the demand-supply balance of gilts, at a time when gilts are already in high demand due to their inclusion in global bond indices, dealers said.

Traders expect the governor's address to shift to supporting growth from curbing inflation, which has been at the top of his agenda in the recent period, dealers said. The voting stance of the panel will also be looked at, as traders are positive that more than one external member of the rate-setting panel would vote for a rate cut in the policy meeting, and the committee will shift its focus towards supporting growth, dealers said. In the last meeting in October, external member Nagesh Kumar voted for a rate cut, while others favoured a status quo.

Traders also look ahead to an unusual announcement in the statement--about the future of Das as RBI governor. His tenure is scheduled to end on Tuesday. Further, traders will assess their bidding strategies at the weekly gilt auction following the governor's statement. The government will sell INR 70 billion of a new 2027 gilt, INR 130 billion of the 6.92%, 2039 gilt and INR 100 billion of the 7.09%, 2054 gilt at 1230-1330 IST. All three tenures have been well received at previous auctions, and the issue of a new three-year paper is good news for domestic banks' liquidity management, dealers said. The RBI is likely to implement new guidelines on liquidity coverage next financial year. 

The softening of US Treasury yields may slightly push up gilt prices at the market open and may add an incentive for foreign investors to buy gilts during the day. However, traders' focus will remain on domestic cues intraday, they said. The yield on the 10-year US Treasury note fell to 4.18% from 4.21% at 1700 IST Thursday.  (Cassandra Carvalho)

End

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

Edited by Deepshikha Bhardwaj

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