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Informist, Monday, Dec. 23, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices ended higher due to a fall in US Treasury yields since Friday on softer-than-expected inflation data. Comments from members of the Reserve Bank of India's Monetary Policy Committee in the minutes of the December policy review kept the hopes of a February rate cut intact, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.10, or 6.77% yield, against 99.99, or 6.79% yield on Friday. The benchmark yield had risen by 5 basis points last week.

The yield on the 10-year US Treasury note eased to 4.54% at the end of Indian market hours, from 4.56% at 1700 IST on Friday. The US Federal Reserve's preferred inflation gauge rose less than expected in November, but did not change market expectations of only a 50-bps US rate cut next year, as guided for by US Federal Open Market Committee members last week, dealers said.

"The MPC members are making the right noises in the minutes," a dealer at a state-owned bank said. "I think that made some difference today (Monday). Otherwise, it was mostly follow-up buying from the US yields coming down, inflation there was in a good spot."

Both Nagesh Kumar and Ram Singh--external members who voted for a 25-basis-point repo rate cut in December--said a rate cut would bring down the cost of doing business, stimulate private-sector investment and aid consumer demand in the economy. RBI Executive Director Rajiv Ranjan, the only RBI member scheduled to vote in the February meeting, said it was important to get confirmation on a durable softening in inflation before cutting rates.

Traders were of the view that despite the members' concern about a growth slowdown, upcoming economic data may play a greater role in determining the outcome of the February MPC meeting. In data released since the last policy review, CPI inflation eased to 5.48% in November, after surging above the RBI's tolerance band of 2-6% in October. The next inflation print for December, as well as data on the economy's output and the government spending, would be keenly watched for the next cues on domestic interest rates, dealers said. GDP growth in Jul-Sept surprised analysts, bond traders and the RBI by slumping to a seven-quarter low of 5.4%.

Moreover, the movement in the rupee would be crucial in determining whether the MPC will be comfortable in cutting interest rates, dealers said. Treasury officials have said the recent depreciation in the domestic unit--it fell to a record low of 85.1250 a dollar on Monday--shows a shift in the RBI's strategy on foreign exchange. The central bank had maintained an iron grip on the currency since mid-2023, limiting both volatility and depreciation despite a strong dollar.

A rate cut would only exert more downward pressure on the rupee, and dealers said the RBI members of the MPC may not favour a rate cut even in February in order to protect the currency. However, external member Nagesh Kumar told Informist in an interview after the minutes that he was afraid of the rupee's appreciation if the repo rate continues to be held at 6.50%. "India needs to guard against the risks of currency appreciation in real terms as it would hurt the competitiveness of Indian products," Kumar said. 

Private banks likely covered their short bets on gilts due to the fall in US yields, after piling up on them last week, dealers said. Mutual funds may also have picked up gilts in small quantities, while state-owned banks likely turned sellers as prices rose during the day. The near-term view is that the 10-year gilt yield may not top 6.80%--a level it hasn't breached since the disappointing GDP release--until the end of the year, which lacks fresh domestic triggers. Foreign banks were speculated to be on the buying side for rate-sensitive gilts maturing under five years, though they may have trimmed their holdings of bonds maturing in 10 years and above to make those purchases, dealers said. 

At the open, bond prices fell slightly, before recovering almost immediately. Some traders were disappointed that data on Friday showed the RBI did not buy or sell gilts in the secondary market in the week to Dec. 13, as they had hoped for. The central bank's measures to infuse durable liquidity are keenly awaited by traders, even as it conducted two variable rate repo operations Monday.

Anticipation of a rise in prices from open market purchase of gilts by the RBI has faded slightly as traders are eyeing the second-tranche of Cash Reserve Ratio cut to gauge liquidity conditions. While one tranche of the cut is already effective, the remaining 25-basis-point cut in the Cash Reserve Ratio to 4% of banks' net demand and time liabilities will be effective from Dec. 28. According to data on the RBI's website, the liquidity deficit widened on Sunday to INR 1.91 trillion, a seven-month high.

"Until there is clarity on whether the RBI is buying gilts, the whispers will keep coming," a dealer at a private bank said. "There is no doubt that he (the RBI) will conduct an OMO, but every house in the market is trying to get the timing right."

Trade volumes were dull through the day due to a lack of firm cues beyond US yields, along with traders being on leave due to the holiday-shortened week. Several dealers are on leave around Christmas and the New Year. Foreign banks' trading activity has also shrunk to a standstill as they close their accounts at the end of the calendar year, dealers said. 

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 276.75 billion, lower than INR 300.20 billion on Friday. Two trades worth INR 100 million were settled using the wholesale digital rupee pilot on Friday, against no trades the previous two days.

OUTLOOK

On Tuesday, prices of government bonds may take cues from the overnight movement in US Treasury yields after the release of consumer confidence data in the world's largest economy, dealers said. The weakening domestic currency--the rupee fell to a record low against the dollar Monday--may weigh on demand on gilts from foreign investors.

Any major geopolitical developments and movement in crude oil prices could also lend cues to gilt prices at the open. The yield on the 6.79%, 2034 bond is seen at 6.74-6.82% on Tuesday.

India Gilts: Remain up on fall in US yields, India rate cut hopes Feb

MUMBAI--1600 IST--Government bond prices remained up and traded in a narrow range owing to lack of fresh triggers, dealers said. In addition to a fall in US Treasury yields since Friday, there was positive sentiment among traders on a February repo rate cut in India after the minutes of the Monetary Policy Committee's December meeting were released, dealers said.

Two external members--Nagesh Kumar and Ram Singh, voted for a 25-basis-point cut at the meeting. The minutes, released Friday, showed that slowing growth was becoming a widespread concern among the six-member panel. However, traders said that a policy rate cut at the next MPC meeting would be majorly dictated by the upcoming macroeconomic data. Moreover, two of the RBI members – Shaktikanta Das and Michael Patra – may not be a part of the rate-setting panel at the next meeting.

Private banks are likely covering their short bets on gilts with the purchases, though the price movement has been amplified due to the muted trade volume, dealers said. Meanwhile, other sections of the market are waiting for further cues and kept to the sidelines. Dealers are not expecting any significant prompting from the domestic side and said market activity will be guided by the trajectory of US yields for the rest of the week.

"There is the usual intraday trading, which is happening in a very narrow range as there are no volatile cues in the market," a dealer at a primary dealership said.

Action by the Reserve Bank of India to manage the banking system liquidity is also keenly eyed by the traders. Banking system liquidity has fallen into a sharp deficit, in part due to the RBI's aggressive dollar sales over the last two months to protect rupee depreciation against the greenback. According to central bank data, the liquidity deficit widened on Sunday to INR 1.91 trillion, a seven-month high, after goods and services tax outflows. Meanwhile, the rupee fell to a record low of 85.1250 per dollar on Monday.

"There is a lot of speculation regarding OMOs (open market operations) by RBI to infuse liquidity, and it will be interesting to watch how RBI acts on it," a dealer at a private bank said. "It is currently very active with the VRRs (variable rate repo auctions) but the market needs some durable support."

The market turnover was INR 224.05 billion, against INR 259.25 billion at 1330 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.77-6.80%. (Vidhushi RajPurohit)

India Gilts: Remain up; trade volumes muted on lack of intraday cues 

MUMBAI--1330 IST--Prices of government bonds remained up due to a fall in US Treasury yields since the Indian market close on Friday. Dealers cited a lack of significant cues in the market and the upcoming Christmas and New Year holidays as the reason for tepid trade volumes.

Private banks and mutual funds likely picked up gilts near the open due to the fall in the 10-year US Treasury yield by 3 basis points to 4.53%, dealers said. Dealers are seeing 6.80% yield on the 10-year benchmark 6.79%, 2034 gilt as a key support level, which they don't anticipate being breached in the near term. The 10-year gilt has not hit that level since disappointing GDP data for Jul-Sept stoked rate cut expectations in India at its release on Nov. 29, and traders still look ahead to rate cuts by the Reserve Bank of India's Monetary Policy Committee in February.

"Public sector banks have already bought enough bonds at the current level, so they will wait for the yields to move up before buying again," a dealer at a private bank said.

Activity of foreign banks is muted as they are closing their accounts near the end of the year. The absence of foreign banks has led to a subsiding of selling pressure, dealers said. However, traders expect selling to pick up on Thursday ahead of the weekly gilt auction on Friday. Mutual funds are also seen as likely to start selling off to fund their redemption needs near the month- and quarter-end.

Traders are not expecting much movement in gilt prices during the day. Anticipation of a rise in prices from open market purchase of gilts by the RBI has faded slightly as traders are eyeing the second-tranche of cash reserve ratio cut to gauge liquidity conditions. While one tranche of the cut is already effective, the remaining 25-basis-point cut in the cash reserve ratio to 4% of banks' net demand and time liabilities will be effective from Dec. 28. According to data on the RBI's website, the liquidity deficit widened on Sunday to INR 1.91 trillion, a seven-month high.

"The CRR cut will provide some support to liquidity and until then the RBI will not step in with an open market operation," a dealer at a primary dealership said.

The market turnover was INR 164.45 billion, against INR 125.00 billion at 1330 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.77-6.80%. (Vidhushi RajPurohit)

India Gilts: Up on fall in US yields, persisting India rate cut hopes

MUMBAI--1020 IST--Prices of government bonds were up due to a fall in US Treasury yields over the weekend. Traders also found the yield on the 6.79%, 2034 gilt lucrative due to their persisting hopes of a rate cut in India in February, dealers said.

The yield on the 10-year US Treasury note eased to 4.53% from 4.56% at 1700 IST Friday, after US inflation was slightly softer than expected. State-owned banks likely picked the domestic 10-year benchmark paper for their investment portfolios, as they did not expect to get a further bargain, dealers said. Despite selling pressure last week, the benchmark yield did not rise above 6.80% last week.

"There is no other data lined up in the week and the holiday is also there, so the only cue to track is any movement in US yields," a dealer at a state-owned bank said. "The yield (on 10-year benchmark gilt) also seems attractive right now. Some buying interest is also coming in because of that."

Traders' expectation of the Reserve Bank of India coming out with open market bond purchases faded after data released Friday showed the RBI did not buy or sell any gilts in the secondary market for the week ended Dec. 13. "For now, the RBI seems comfortable in managing the liquidity constraints through VRR (variable rate repo) auctions, and most of the major payments have already gone out, I don't think RBI will come out with the (OMO) auction this week," a dealer at a private bank said. 

Gilt prices are expected to move within a thin range due to lack of further data cues during the week. Trading volumes were also muted in a truncated week due to the Christmas holiday with several traders absent from dealing rooms, dealers said.

The market turnover was INR 50.15 billion, down from INR 99.82 billion at 1030 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.76-6.82%.  (Srijita Bose)

India Gilts: Seen up on fall in US ylds; muted volume seen in Christmas week

MUMBAI – Prices of government bonds may open higher, tracking a fall in US Treasury yields over the weekend. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.76-6.82% compared to 6.79% Friday. 

The yield on the 10-year US Treasury note eased slightly to 4.53% at 0840 IST from 4.56% at 1700 IST Friday. Data released after Indian market hours Friday showed core PCE rose 0.1% on month in November from 0.3% in October and below the consensus 0.2% rise. While the US Federal Reserve's preferred inflation gauge cooled, it is not seen making a material difference to the 50 basis points of rate cuts that Federal Open Market Committee members have forecast for 2025.

Moreover, traders are watchful before US President-elect Donald Trump assumes office on Jan. 20. With higher tariffs and tax cuts, Trump's policies are seen as inflationary for the US economy. This is likely to drive up US yields further, making emerging market assets such as India's gilts less attractive for foreign investors, dealers said. 

Prices of bonds could move in a thin band due to the lack of any further cues during the week, dealers said. Trade volumes could be low during the week as several traders are on leave for Christmas and New Year. Activity from foreign banks and foreign portfolio investors could be muted as they close their accounts at the end of the year, dealers said. 

Meanwhile, the lack of open market bond purchases by the Reserve Bank of India in the week ended Dec. 13 could cut into any rise in prices Monday. Data released Friday showed the RBI did not buy or sell any gilts in the secondary market in the previous week. Some traders may trim their portfolios as they had expected central bank operations to shore up a massive liquidity deficit, even though positioning on the RBI's purchases had been light and may not have a sharp impact on the market, dealers said.  (Srijita Bose)

End

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

Edited by Akul Nishant Akhoury

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