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Informist, Thursday, Dec. 12, 2024

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended lower Thursday as traders shed bonds before Friday's auction, expecting to pick up the gilts at cheaper prices, dealers said. The much-awaited November CPI inflation print at 1600 IST did not lend direction to gilts because it was in line with traders' expectations. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.35, or 6.74% yield, against INR 100.51, or 6.72% yield Wednesday. "The market went jittery in the last trading hour, as they started lightening their holdings to buy fresh again at Friday's auction at a lower price," a dealer with a primary dealership said. The government will sell INR 220 billion worth of the 6.79%, 2034 bond, INR 50 billion worth of the 2054 green bond and INR 100 billion worth of the 7.09%, 2074 bond at 1030-1130 IST on Friday. 

Private banks and primary dealerships were placing short bets on account of Friday's auction, erasing the positive impact of the inflation data, dealers said. India's November CPI inflation print was in line with the market's expectations at 5.48%, sharply down from 6.21% in October. In an Informist poll, the median estimate for the inflation print was 5.6%.

Gilt prices did not have any volatile reaction to the inflation print as the expectations of a 25-basis-point rate in February remained intact, dealers said. However, traders said they will keep a watch for further cues on both domestic and global fronts to cement their bets, as the next Monetary Policy Committee meeting is nearly two months away.

Volume picked up after the release of CPI data, which was largely on account of short bets being placed by traders to participate at the weekly gilt auction Friday with a greater appetite, dealers said. While papers maturing in 2034 fell the most, likely due to the upcoming supply of the 10-year bond on Friday, losses in other papers were limited. In fact, some long-term bonds gained slightly due to demand from long-term investors, dealers said.

At the open, gilt prices were down tracking US Treasury yields, and remained in a thin band before the release of domestic inflation data. The yield on the 10-year US Treasury note rose to 4.30% at 1700 IST from 4.24% on Wednesday. Foreign banks were likely selling gilts before the data release and after the overnight rise in US yields. However, the size of the sales was likely not large, as trade volume was subdued before 1600 IST, dealers said.

"There was limited movement in the market, as even the traders who were looking to make space for bonds before tomorrow's (Friday) auction were in a watchful mode to avoid risky bets ahead of inflation print," a dealer with a private bank said. 

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 403.25 billion, against INR 339.30 billion Wednesday. No trade was settled using the wholesale digital rupee pilot on Thursday, same as Wednesday. 

OUTLOOK

Gilts may open steady on caution ahead of the INR 370 billion gilt auction. Traders may take cues from auction results. Traders may take a view on a possible rate cut in February in the later half of the trading session depending on the demand for fresh supply at the auction. The overnight movement in US yields after the weekly unemployment claims data and US Producer Price Index at 1900 IST Thursday may also lend gilt prices cues at the open, dealers said.

Any overnight developments in West Asia and the Russia-Ukraine war may impact gilt prices at open. Crude oil prices could also lend cues to bond prices. The yield on the 6.79%, 2034 bond is seen at 6.70-6.77% Friday.

India Gilts: Fall as PDs trim holdings before auction; CPI in line with view

MUMBAI--1635 IST--Prices of government bonds fell more as primary dealers trimmed their portfolios to make room for fresh supply at the weekly gilt auction on Friday. India's CPI inflation for November at 5.48% was slightly lower than traders expected, but the expected rise in prices was wiped out by primary dealers' sales, dealers said.

Headline inflation was a tad lower than an Informist poll estimate of 5.6%, and sharply down from 6.21% in October. Traders had bet on a print between 5.5% and 5.9%. Dealers said the relief from the CPI reading was furthered as core inflation in November was unchanged from the previous month at 3.7%. The data print furthered expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February.

However, bond prices fell more as primary dealerships and others who were not able to place short bets to make room for the INR 370-billion auction ahead of the data, rushed to place short bets, dealers said. The government will sell INR 220 billion of the 6.79%, 2034 bond, INR 50 billion of a new 2054 green bond and INR 100 billion of the 7.09%, 2074 bond at 1030-1130 IST on Friday.

"We were expecting a sell-off before the auction (on Friday) if the data printed along the expected lines. The data is good, we're anticipating a bigger push for a February rate cut, but now everyone is shedding their positions because of the auction," a dealer at a state-owned bank said.

Last week, the MPC kept the repo rate unchanged at 6.50%, but reduced the cash reserve ratio by 50 basis points to 4% of banks' net demand and time liabilities. With a newly-appointed governor Sanjay Malhotra at the helm of the central bank, traders firmed up bets of a 25 bps cut by the rate-setting panel in February.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 326.90 billion, up from INR 274.75 billion at 1630 IST on Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.79%. (Cassandra Carvalho)

India Gilts: Remain down, move in thin band on caution ahead of CPI print

MUMBAI--1300 IST--Prices of government bonds remained down and moved in a narrow band as traders refrained from placing any aggressive bets ahead of India's CPI data at 1600 IST, dealers said. At the open, gilts took cues from the overnight rise in US Treasury yields.

"The market is dull right now as everyone is eyeing the inflation print to provide some cues to the market," a dealer with a state-owned bank said. "At the open, the prices moved according to the US yields, but now the market awaits domestic cues to determine the further trajectory."

Market participants expect inflation for November to have cooled down to 5.50-5.90%, from 6.21% in October. If headline inflation is within this range, dealers expect that the market will fully price in a 25-basis-point repo rate cut by the Reserve Bank of India's Monetary Policy Committee, under newly-appointed RBI Governor Sanjay Malhotra. Already, expectations on such a rate cut have increased, and volatility may be limited to within 3 basis points from current levels, dealers said.

However, if the inflation print veers sharply away from the anticipated range, traders would reassess their rate cut expectations for February and the 10-year gilt yield may move as much as 7 bps, dealers said. A print below the expected range might provide hope of a 50-bps rate cut. On the other hand, CPI inflation at or above 6% could weaken the rate cut expectations, dealers said. Traders are heavily invested in gilts, expecting yields to fall sharply by March due to rate cuts and increased foreign portfolio investments, and were trimming their portfolios slightly to reduce their risk around the data point, they said.

Until 1600 IST, gilt prices are expected to remain in a thin band as the market is in a "wait and watch" mode, dealers said. Some traders were concerned that high food prices, which persisted in November from the two previous months, could continue to push up the headline CPI inflation print. Foreign banks were likely selling gilts before the data, but dealers were unsure about their overall strategy.

Meanwhile, traders also cited the tight liquidity conditions in the banking system as the reason for limited trade volumes. According to RBI data, the liquidity surplus on Wednesday was INR 471.29 billion.

"This month liquidity is largely expected to remain range-bound as there are tax outflows, but we will be able to assess the position better once the CRR (cash reserve requirement) cut is activated," a dealer with a private bank said.

Outflows for advance tax are expected to drain around INR 1.25 trillion to INR 1.5 trillion from the banking system, dealers said. The cash reserve ratio for banks will be cut by 25 bps effective from the fortnight starting Saturday, and by another 25 bps from the fortnight starting Dec. 28, to 4% of their net demand and time liabilities. The move is estimated to increase liquidity in the banking system by INR 1.16 trillion, according to the RBI.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 144.15 billion, down from INR 181.50 billion at 1330 IST on Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.79%. (Vidhushi RajPurohit and Aaryan Khanna)

India Gilts: Down on rise in US yields, India Nov CPI awaited 1600 IST

MUMBAI--1002 IST--Prices of government bonds were down, tracking an overnight rise in US Treasury yields, dealers said. Trade volumes were limited due to caution ahead of India's CPI inflation data for November, due at 1600 IST. 

The yield on the 10-year US Treasury note rose to 4.29% as of 0919 IST from 4.24% at 1700 IST on Wednesday. US CPI inflation data for November, released on Wednesday, came in along expected lines. US yields temporarily eased after the print, as it cemented bets that the Federal Open Market Committee would cut rates by 25 basis points at its meeting next week. However, US yields jumped overnight as the outlook on rate cuts in 2025 was uncertain. CPI data over the past few months has shown that inflation in the US is cooling at a slower pace. An overnight rise in crude oil prices is also likely to have pushed up yields, dealers said. 

On the domestic front, trade volumes were low as traders maintained caution ahead of India's CPI inflation data for November, dealers said. Only three papers were traded in the secondary market as of 0915 IST, according to the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. Some traders sold bonds in light volumes, reducing their risk before the data, dealers said.

"Everyone has already built positions, they bought a lot at 6.70% (when the yield on the 10-year benchmark gilt was 6.70%)," a dealer at a state-owned bank said. "So, they're selling some bonds now, but they're still long (on bonds)." 

An Informist poll estimated India's CPI inflation in November at 5.6%. Traders expect the data to be in the 5.5-5.8% range. Any reading higher or lower could see a swing in yields by around 6-7 bps, as their rate cut bets change, dealers said. A print lower than 5.5%, showing disinflation setting in, could lead to bets of a 50-bps rate cut at the next Monetary Policy Committee meeting in February, against the current 25 bps priced in. Inflation close to 6%, the upper limit of the RBI's tolerance band, could dent hopes of even a quarter percentage point rate cut.

The CPI data comes just a day after Sanjay Malhotra took over as RBI governor from Shaktikanta Das. A new face at the helm of the central bank could see some change in the RBI's commentary on the inflation-growth balance, in favour of growth, dealers said.

According to data on the RBI's Negotiated Dealing System-Order Matching platform, the market-wide turnover was INR 47.75 billion, down from INR 71.50 billion at 0930 IST on Wednesday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.79%. (Cassandra Carvalho)

India Gilts: Seen down as US ylds up; caution before India CPI data for Nov

MUMBAI – Government bond prices are seen opening slightly lower Thursday due to an overnight rise in US Treasury yields after the release of US CPI data. Traders may avoid placing large bets on the offshore cue ahead of the release of India's CPI data for November at 1600 IST, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.79%, against 6.72% on Wednesday. With bond prices falling on Wednesday ahead of the US inflation data, losses may be limited because the 6.75% yield on the 10-year bond is seen as a psychologically crucial level, dealers said. Traders may cover short bets taken ahead of the US CPI data as prices fall.

The yield on the 10-year US Treasury note rose to 4.29% from 4.25% at 1700 IST on Wednesday. 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 the US CPI inflation rose 2.7% on year in November from October's 2.6% rise, in line with expectations. While a 25-basis-point rate cut is widely expected at next week's US Federal Open Market Committee meeting, bets on further rate cuts in the US in 2025 are dwindling, according to the CME FedWatch tool.

On the domestic front, an Informist poll of 14 economists estimated CPI inflation to have fallen to 5.6% in November from a 14-month high of 6.21% in October. If the print nears the upper limit of the Reserve Bank of India's 2-6% comfort band, the chances of a rate cut in February by the RBI's Monetary Policy Committee could take a blow despite the appointment of new RBI Governor Sanjay Malhotra, who is seen favouring rate cuts at the next monetary policy review, dealers said. During the day, traders may place short bets ahead of the CPI data release and the INR 370-billion gilt auction on Friday, they said.  (Srijita Bose and Aaryan Khanna)

End

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

Edited by Deepshikha Bhardwaj

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