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Informist, Friday, Dec. 27, 2024

By Vidhushi RajPurohit and Aaryan Khanna

MUMBAI – Government bond prices ended off lows due to a recovery in the rupee from record lows against the dollar, as well as firm demand for bonds at the weekly debt sale led to cut-off prices at expected levels. Even so, the Indian currency recorded its biggest single-day fall in nearly seven months, before settling at 85.5325 a dollar. The depreciation in the rupee led to a sell-off by foreign banks, erasing early gains.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.02, or 6.79% yield, against INR 100.04, or 6.78% yield on Thursday. Earlier in the day, the benchmark yield hit 6.82%, its highest level since Nov. 27.

Foreign banks likely sold due to outflows from foreign portfolio investors, despite the year-end usually being a quiet time for them due to the closing of accounts. There was panic in the market for some time due to the rupee depreciation, as the Indian unit hit a lifetime low of 85.8025 a dollar only a week after falling below 85 against the greenback. Traders feared imported inflation would rise and foreign inflows into debt may stall in 2025 due to the rupee volatility. However, buying by state-owned banks later aided the gilt prices to recover most of the losses. 

The Reserve Bank of India's dollar sales to help the domestic currency's recovery is seen putting further pressure on rupee liquidity in the banking system, reviving hopes of the central bank buying bonds in the open market, dealers said. The liquidity deficit was at INR 1.89 trillion on Thursday. Some traders speculated the RBI was buying gilts on the anonymous Negotiated Dealing System – Order Matching platform, which they said led to the recovery in gilt prices in the latter half of trade.

"RBI is currently very active with the VRRs (variable rate repo auctions), but the high intervention by it will need a durable support. So there is a very big possibility of an OMO," a dealer at a state-owned bank said. "But, there are so many other factors also involved so its hard to predict." 

Traders were not expecting the 10-year gilt yield to top the 6.80% mark in the near-term, but they said it was an "over-reaction" caused by the declining rupee. The result of the gilt auction allayed the initial panic selling by traders. After touching the 6.82% level, the 10-year benchmark bond was likely picked up by state-owned banks as it topped the trading range seen earlier in December, dealers said. Gilt prices have constantly seen buying from domestic banks due to persisting rate cut expectations in February, ever since India's GDP growth slowed to a seven-quarter low of 5.4% in Jul-Sept.

The sharp depreciation of the rupee was an outlier which the dealers did not anticipate and led to the sudden volatility in the gilt prices, dealers said. The rise in US Treasury yields this week and the earlier depreciation in the rupee – the Indian unit hit record lows against the dollar on each of the last three trading days – had not perturbed the market, and the initial fall to around 85.40 a dollar did not have much impact.

Trade volume was subdued initially heading into the auction, and remained muted even after bidding ended at 1130 IST. Most dealers were eyeing the weekly gilt auction to lend some direction to trade. Ultimately, both trade volume and bond prices moved before that.

"If the rupee would have stayed steady, the trading volume for gilts would have been around yesterday's (Thursday) level," a dealer at another state-owned bank said. "The only trigger we were expecting was from the gilt auction and higher cut-offs there would have moved the market."

The INR 320-billion gilt auction showed robust appetite from investors for all three papers on offer, dealers said. The government sold INR 100 billion of a new 2031 bond, INR 120 billion of the 6.92%, 2039 bond, and INR 100 billion of the 7.09%, 2054 bond at the auction. State-owned banks and primary dealerships picked up the short-tenure papers, and insurance companies' demand was there for the 2054 bond, dealers said. The RBI set the coupon on the seven-year bond at 6.79%, in line with traders' expectations.

The turnover for the day was INR 399.85 billion, up from INR 209.15 billion on Thursday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. Meanwhile, no trades were struck using the wholesale digital rupee pilot Friday, for the second straight day.

OUTLOOK

Gilts are not traded on Saturdays. On Monday, gilt prices may take cues from the US Treasury yields at open, dealers said. Volume is expected to remain muted due to the absence of several traders at year-end. Quarter-end credit demand may keep investment activity of even domestic banks muted, dealers said.

Gilt prices will also track the movement of the Indian rupee against the dollar, after it hit a series of record lows this week. Any major geopolitical developments and movement in crude oil prices could also lend cues to gilt prices at the open. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.77-6.81% during the day.

India Gilts: Off lows; auction on expected lines, rupee recovers some losses

MUMBAI--1404 IST--Prices of government bonds were off lows as the result of the weekly gilt auction was on expected lines and the rupee recovered sharply from a record low hit earlier in the day, dealers said. Bonds remained down as the rupee's depreciation against the dollar triggered a sell-off by foreign banks.

The rupee fell to its lowest ever level of 85.8075 a dollar earlier in the day. The Reserve Bank of India's dollar sales in the latter half of the day fuelled a sharp recovery, though the Indian unit still posted its worst day since Jun. 4 and ended at a record closing low of 83.5325 a dollar. The panic in the market was calmed by investors and traders picking up bonds at the INR-320-billion auction at cut-off prices near the median in an Informist poll.

"The result of the auction did not provide any surprise to the market, and the same is reflected in the current price of the (6.79%, 2034) gilt," a dealer at a state-owned bank said. "The earlier volatility caused due to the fall in the rupee has also moderated."

Traders said the auction saw a large quantum of bids from banks mostly for their asset liability management, as well as from primary dealerships for the new 2031 bond. The Reserve Bank of India set the coupon on the seven-year bond at 6.79%. The 7.09%, 2054 paper was subscribed to by life insurers and pension funds, dealers said. The 6.92%, 2039 paper was expected to see the weakest demand, but traders picked up the paper as its spread over the 10-year benchmark yield was above 10 basis points, they said.

A rise in the 10-year US Treasury yield to 4.61% from 4.58% earlier may keep bond prices lower for the rest of the day. At the same time, investor demand for the 6.79%, 2034 bond near 6.80% yield would continue to limit losses, dealers said. Earlier in the day, the 10-year benchmark gilt yield hit its highest in a month.

"There is nothing much to look in the market itself now. The movement that we saw earlier was due to the fall in rupee, but now the price will not move much from here," a dealer at a private bank said.

The market turnover was INR 345.10 billion, against INR 174.75 billion at 1630 IST Thursday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.82%. (Aaryan Khanna and Vidhushi RajPurohit)

India Gilts: Fall as rupee tumbles to record low; auction result awaited

MUMBAI--1311 IST--Prices of government bonds reversed earlier gains and fell due to a sharp fall in the Indian rupee, to a record low against the dollar. The rupee fell sharply to 83.7350 a dollar, down nearly 50 paise on the day, falling the most in nearly 23 months. Trade volumes shot up due to the unexpected rupee volatility, but several dealers were still on the sidelines ahead of the INR 320-billion gilt auction result, dealers said.

"The fear is that the RBI is letting the rupee go, the panic is there in gilts also," a dealer at a private bank said. "Foreign banks are already selling now, but difficult to say what the longer-term view would be."

The rupee has fallen to record lows on each of the prior three days this week, and the sharp fall – the Indian unit hit 85 a dollar only last week – suggests a new comfort that the RBI has with rupee depreciation, dealers said. This may turn away foreign portfolio investors looking to enter the market in 2025, as these investors had picked up gilts in 2024 due to the stability of the currency against its peers, they said.

At the gilt auction, which took place before the rupee volatility, bidding was seen divergent across the three papers on offer. The government sold INR 100 billion of a new 2031 bond, INR 120 billion of the 6.92%, 2039 bond, and INR 100 billion of the 7.09%, 2054 bond at the auction. 

"Demand at the auction will be modest, there could be a maximum 5-10 paise tail but broadly, the market is not expecting much of a surprise at the auction," a dealer at a primary dealership said.

The seven-year gilt is expected to attract interest from banks, both state-owned and private, for their asset-liability management. For the 30-year papers, dealers expect bidding from life insurance companies and pension funds, the usual investors in these bonds owing to their long-term liabilities. Some traders said they did not expect much demand for the 2054 bond through forward-rate agreements due to lack of foreign banks in the market near the end of the year, while others said demand from insurers was present for such contracts and domestic banks would be able to fulfil it.

"Foreign banks are the major participants at forward-rate agreements, and now near year-end, they are mostly absent from the market," a dealer at a private bank said.

Traders are expected to have bid for the 2039 bond to cover their earlier short-selling, but the paper will have the poorest bidding among the three papers due to lack of investor demand, dealers said. However, short sales have been modest in the paper due to muted trade volumes in the market near the year-end, with several traders on leave between Christmas and New Year.

The market turnover was INR 172.25 billion, against INR 50.05 billion at 1030 IST Thursday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.81%. (Aaryan Khanna and Srijita Bose)

India Gilts: Tad up on fall in US ylds; caution before INR 320-bln auction

MUMBAI--1020 IST--Prices of government bonds were a tad up due to an overnight fall in US Treasury yields, dealers said. Traders were, however, cautious ahead of the INR 320-billion gilt auction at 1030-1130 IST. 

The yield on the 10-year US Treasury note eased to 4.58% from 4.62% at 1700 IST Thursday due to a strong auction for US treasuries. Back home, the gilt auction was likely the only major cue amid a lack of trading activity near the year-end, dealers said. The government will sell INR 100 billion of a new 2031 bond, INR 120 billion of the 6.92%, 2039 bond, and INR 100 billion of the 7.09%, 2054 bond at the auction.  

"The auction is the only intraday cue today (Friday), and depending on how it comes, some reaction could be there," a dealer at a private bank said.  "So the market is still assessing how the demand will be at auction, but mostly it should sail through with a slight tail." 

Dealers expect demand for the new seven-year gilt to come from banks for their asset liability management. For the 30-year bond, insurers and pension funds are likely to be bidding as current levels are seen lucrative, with the bond's price having fallen 25 paise this week, dealers said. However, the 15-year paper may be poorly bid as it does not have a natural buyer, they said. Traders are also wary of bidding aggressively on the paper as its previous auction had surprised the market, with poor demand and a sharply lower-than-expected cut-off price.

The market turnover was INR 16.05 billion, lower than INR 19.55 billion at 1030 IST Thursday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.75-6.81%.  (Srijita Bose)

India Gilts: Seen steady before auction; fall in US ylds may aid

MUMBAI – Prices of government bonds are seen steady ahead of the INR 320-billion gilt auction at 1030-1130 IST, dealers said. Prices could open slightly higher due to an overnight fall in US Treasury yields. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.75-6.81% compared to 6.78% on Thursday. 

The government will sell INR 100 billion of a new 2031 bond, INR 120 billion of the 6.92%, 2039 bond, and INR 100 billion of the 7.09%, 2054 bond at the auction. Some traders could likely place short bets before the auction. Traders fear demand at the auction could be lacklustre due to the large size and inadequate short selling till Thursday on low trade volumes and tight liquidity conditions. 

However, there will likely be demand for the new seven-year, 2031 bond as investors will pick up the paper for their asset liability management, dealers said. State-owned banks are likely to pick up a large chunk of the bonds at the auction after being net sellers in the secondary market throughout the week, dealers said. 

The yield on the 10-year US Treasury note eased to 4.58% at 0815 IST from 4.62% at 1700 IST Thursday, which could give opening cues to gilt prices. Weekly unemployment claims in the US came in lower than expected and pushed up yields to a fresh multi-month high. However, robust demand at auction pulled down US yields.

Foreign banks and foreign portfolio investors will stay away from trading gilts as they close their accounts at the end of the year, dealers said. Trade volumes in the secondary market are expected to remain muted as several traders are on leave in the period between Christmas and New Year.  (Srijita Bose)

End

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

Edited by Deepshikha Bhardwaj

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