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Informist, Tuesday, Dec. 24, 2024

By Aaryan Khanna

NEW DELHI – Government bond prices recovered nearly all losses and ended little changed on Tuesday as investors picked up gilts betting on the Reserve Bank of India's Monetary Policy Committee cutting the repo rate at its next meeting in February, dealers said. Bond prices had fallen earlier due to an overnight rise in US Treasury yields and poor demand for some state bonds at the auction.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.09, or 6.77% yield, against INR 100.10, or 6.77% yield on Monday. The benchmark yield has not topped the psychologically crucial 6.80% yield since Nov. 29.

The yield on the 10-year US Treasury note rose to 4.61% at the end of Indian market hours Tuesday, from 4.52% at 1700 IST, due to concern over US President-elect Donald Trump's fiscal policies, which are expected to be both inflationary and fiscally profligate. Investors shrugged off the offshore cue, as they were of the view the 6.79%, 2034 gilt was lucrative to pick up around the 6.78-6.80% yield should the MPC cut repo rates in February. 

"Like we saw a couple of months ago, when US yields were rising and we failed to break 6.85%, a repeat of that will happen around 6.80% I feel," a dealer at a private bank said. "After the minutes (of the December MPC meeting), February certainly looks like a live policy."

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.

With food inflation easing in November, traders are hopeful that kharif crop arrivals will further help ease headline CPI inflation in December, which will be the latest print before the next MPC meeting in February, dealers said. Gilt prices had risen on Monday after the release of the minutes last week, and some traders were hopeful bond yields may fall to 6.60% or below in early February, after the release of the Union Budget for 2025-26 (Apr-Mar) and a potential repo rate cut.

In addition to the view on domestic interest rates, dealers said the positive demand-supply dynamics are keeping losses limited on bonds, while a fall in US yields would again trigger some buying. State-owned banks likely picked up gilts as prices fell, and mutual funds and corporate houses were also speculated to be on the buying side. There was not a lot of selling pressure for traders to deal with through the day as foreign banks' activity was minimal in the last week of 2024, dealers said. After settling their accounts for 2024, they are likely to re-appear only next week, with some sections of the market hopeful of foreign portfolio investments flowing into India's gilts.

"US yields are going haywire, but FPIs are already underweight on India. Further sales in a structural manner seem unlikely unless there is a warning sign, which we haven't heard about," a dealer at a primary dealership said. "Everyone will get enhanced risk limits, and if we remain at these levels, there could still be some positivity from offshore in the first week of January."

After recovering from the early losses due to US yields, poor demand for some state bonds at the INR-306-billion auction weighed on gilt prices. The cut-off of Assam's 10-year bond was at 7.19%, higher than the expectation of 7.14% in an Informist poll. But the dip in gilt prices was bought into almost immediately due to investors' demand, dealers said. 

Meanwhile, traders were on tenterhooks about whether the RBI would conduct open market operations to buy bonds in order to infuse durable liquidity into the financial system. Dealers said the RBI may wait for the second tranche of the Cash Reserve Ratio cut to gauge liquidity conditions before taking the call on bond purchases. 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 Saturday. It is expected to add around INR 600 billion of durable liquidity into the banking system.

US yields may continue to lend direction to prices, but the 6.80% yield on the 10-year benchmark gilt is unlikely to break the current high levels until at least next week. Moreover, dealers are eyeing the evolving liquidity conditions in the banking system. The liquidity deficit widened to INR 2.43 trillion on Monday, the highest since May 21. The rupee's fall to a record low for the second consecutive day also weighed on gilt prices early in the day, dealers said. The domestic unit hit a record low of 85.2100 a dollar Tuesday, largely due to importers' demand.

According to the RBI's Negotiated Dealing System-Order Matching platform, the turnover for the day was INR 240.00 billion, lower than INR 276.75 billion on Monday. One trade worth INR 50 million was settled using the wholesale digital rupee pilot, against two trades worth INR 100 million the previous day.

OUTLOOK

India's financial markets are shut on Wednesday for Christmas. On Thursday, traders expected lacklustre trading volumes as several dealers are on leave between Christmas and the New Year, dealers said. 

Prices of government bonds may take cues from the movement in US Treasury yields. The weakening domestic currency--the rupee fell to a record low against the dollar Tuesday--may weigh on demand on gilts from foreign investors. Activity from foreign banks and offshore investors is seen limited until the new year, dealers said.

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: Recover losses despite rise in US ylds, poor state bond sale

MUMBAI—1620 IST--Prices of government bonds recovered early losses and consolidated in a thin band. Consistent investor buys prevented prices from falling, despite an overnight rise in US Treasury yields and a weaker-than-expected state bond auction. The cut-off of Assam's 10-year bond was at 7.19%, higher than traders' expectations of 7.14%, dealers said.

"Some knee-jerk selling came immediately after the (state-bond) auction, but the market readjusted as domestically these levels (yield on 6.79%, 2034) are looking good in the longer tenure," a dealer at a private bank said. "The only pressure is from US yields and the uncertainty around (US President-elect Donald) Trump, if he behaves properly then our markets could see a drop to 6.60% (yield on the 10-year benchmark gilt) by January and on that view 6.75-6.80% is lucrative."

State-owned banks likely bought gilts when prices fell to the day's low and a large corporate house was also speculated to be buying gilts while paying the five-year overnight indexed swap rate, dealers said. Gilt prices are seen less sensitive to the rising US yields than OIS rates. The muted trade volumes owing to the Christmas holiday and the year-end were also limiting gilt prices within a narrow band.

Traders do not expect any further volatility during the day. US yields may continue to lend direction to prices, but the 6.80% yield on the 10-year benchmark gilt is unlikely to break the current high levels until at least next week. Moreover, dealers are eyeing the evolving liquidity conditions in the banking system. The liquidity deficit widened to INR 2.43 trillion on Monday, highest since May 21.

Dealers await 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. It is expected to add around INR 600 billion of durable liquidity to the banking system.

"An open market purchase of gilts by the RBI will be a huge positive for the bond market right now, but the central bank will likely wait for one more week to understand the situation better," a dealer at a private bank said. 

The market turnover was INR 207.85 billion, against INR 231.05 billion at 1630 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.76-6.82%.  (Vidhushi RajPurohit)

India Gilts: Down on rise in US yields; investor demand limits losses

MUMBAI--1235 IST--Prices of government bonds remained down after US Treasury yields rose overnight. A fall in the Indian currency against the dollar also weighed on gilt prices, dealers said. However, the losses were capped due to overall subdued participation in the bond market ahead of the Christmas holiday on Wednesday, with some investors' buys near the 6.78% yield on the 10-year benchmark 6.79%, 2034 gilt enough to prevent a further fall.

On Tuesday, the rupee fell to a lifetime low of 85.1950 against the dollar on importers' demand for the greenback. However, the minutes of the December Monetary Policy Committee meeting kept traders' rate cut hopes for the February meeting intact and led to some buys. Moreover, mutual funds and corporate houses, along with state-owned banks, were likely on the buying side. Foreign banks and primary dealerships were likely selling, though the volumes were subdued, and it was difficult to gauge the activity of each market segment, dealers said.

"Movement of prices is very limited, as there are no significant triggers to act on and nothing to read much in the market," a dealer at a private bank said. "We are moving in the direction that is guided by US yields."

Trade volumes remained subdued as dealers are away for the Christmas and New Year holidays. Despite the stagnant secondary market, dealers expect the state-government bond auction for INR 306 billion to be well subscribed due to robust investor appetite. Dealers expect greater demand for longer-tenure papers at the auction.

The market turnover was INR 106.80 billion, against INR 106.15 billion at 1230 IST Monday, 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%.  (Vidhushi RajPurohit)

India Gilts: Down as US yields rise; losses limited on hope of Feb rate cut

MUMBAI--1030 IST--Prices of government bonds were down following an overnight rise in US Treasury yields, dealers said. The yield on the 10-year US Treasury note rose to a near seven-month high of 4.59% from 4.52% at 1700 IST on Monday. 

Traders remained watchful before US president-elect Donald Trump assumes office in January, despite US consumer confidence in December being lower than expected. Trump is expected to execute policies that impose tariffs and tax cuts, which could be inflationary for the economy and thus lead to further rise in US yields.

The losses were, however, limited as traders bought gilts as they found the yield level on the 10-year benchmark 6.79%, 2034 bond lucrative at 6.78-6.80% due to the view that the Reserve Bank of India's Monetary Policy Committee could cut rates in February. Some traders also expect the Reserve Bank of India to come out with open market bond purchases in the next week, but most found some comfort as they expect liquidity conditions to ease by the end of the week. Scheduled outflows for tax in December have already taken place, and the second tranche of the cut in cash reserve ratio will infuse funds on Saturday, dealers said.

"There is good support at this level, the worst for the liquidity looks to be over for now, so some comfort is coming in because of that," a dealer at a primary dealership said. "US yield (on the 10-year benchmark) has also not moved above 4.60%, so that is also providing support for people to buy."

Trade volumes were muted as several traders were absent on Christmas Eve. Foreign banks and foreign portfolio investors are also expected to stay away from trading gilts as they close their accounts at the end of the year, dealers said.

The market turnover was INR 43.25 billion, down from INR 51.25 billion at 1030 IST Monday, 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 down as US ylds rise; volumes seen muted on Christmas eve

MUMBAI – Government bond prices may open lower, tracking an overnight rise in US Treasury yields, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.76-6.82% compared to 6.77% on Monday. 

The yield on the 10-year US Treasury note rose to 4.59% at 0815 IST from 4.52% at 1700 IST on Monday, hitting levels last seen in May. Despite US consumer confidence data showing weaker confidence in business conditions, traders remained watchful before US president-elect Donald Trump assumes office in January, as he is expected to impose tariffs and tax cuts, leading to a rise in inflation in the US. The yield on the 10-year US Treasury also rose after most recent quarterly projections by US central bank officials-- known as the dot plot--saw them cut in half their estimates for the overall number of rate cuts next year.

Trade volumes are expected to remain muted throughout the day as several traders remain absent on Christmas Eve. Foreign banks and foreign portfolio investors will also stay away from trading gilts as they close their accounts at the end of the year.

Prices of gilts are seen moving in a narrow range after the initial fall due to lack of any incremental domestic cue. Some domestic traders may pick up gilts in light volumes as the yield on the 10-year benchmark nears 6.79-6.80%, dealers said. The benchmark yield did not rise above 6.80% last week despite strong selling pressures. Hope of a rate cut by the Reserve Bank of India's Monetary Policy Committee in February could keep the losses limited, 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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