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Informist, Monday, Dec. 30, 2024

By Vidhushi RajPurohit and Aaryan Khanna

MUMBAI – India's government bond prices ended higher in thin trade due to scattered buying towards end of the trade by state-owned and private banks, likely for their asset-liability management. The outlook for bonds had improved after firm investor demand on Friday prevented the 10-year benchmark gilt yield from sustaining above the crucial 6.80% mark, dealers said. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.11, or 6.77% yield, against INR 100.02, or 6.79% yield on Friday. According to data from the Reserve Bank of India's Negotiated Dealing System – Order Matching platform, secondary market trade volumes were the lowest in a year.  

During the day, prices were largely steady as dealers cited both traders being on leave near the new year and lack of firm cues for bond prices. Trade volumes were too low for dealers to decipher any positioning in the market. Activity from foreign banks is expected to resume after Jan. 1, with a resumption of normal volumes likely only next week. 

"There is no volume, no buyers and no sellers. The market is drawing to a close now and there's nothing to point out in today's trade," a dealer at a private bank said. "The limited trading could have been for some banks' book requirements."

The late activity from long-term investors and banks' asset-liability managers was giving confidence to traders that prices would move upward later this week. Some dealers compared the buying activity late in the day to the recovery in gilt prices in the latter half of Friday, when bonds recovered nearly all losses.

Traders noted the RBI's dollar sales to limit losses in the rupee on Friday and Monday, which drained rupee liquidity in the banking system. This led to optimism the central bank would inject durable liquidity through open market purchases of bonds, with the additional aim of growing its domestic balance sheet to offset the shrinking on the forex side, dealers said. This was one of the reasons for the optimism on gilts, although dealers said no large positions had been built based on the RBI buying gilts through an open market operation auction.

Some dealers count on the tool as a necessary step to provide durable support to banking system liquidity. Others remain doubtful, saying that an OMO would be a last resort in the current environment with supply exceeding demand. The central bank may only utilise after taking into account the impact of the cash it freed up for banks to use last week, dealers said. The Cash Reserve Ratio of banks has come down to 4% of net demand and time liabilities with the second cut of 25 basis points coming into effect on Saturday. However, the systemic liquidity remained in a deficit at INR 1.83 trillion on Sunday, latest RBI data showed.

This liquidity deficit and credit demand at the quarter-end were another reason for the dull volumes, dealers said. Traders also largely disregarded the movement in US Treasury yields during the day, though they said it may lend cues to the market on a day-to-day basis. 

"There is no point in talking about today. On days like these, you can't really gauge what the market is actually doing," a dealer at a primary dealership said. "That said, it is a good sign that buying interest is coming, because all of this is without foreign participation for the most part." Foreign banks have been 21% or less of the secondary market's buy and sell volumes since Dec. 18, according to Clearing Corp. of India data.

Dealers looked ahead of the indicative calendar for state borrowing through bonds in Jan-Mar. They expect the notified amount to be around INR 4.5 trillion, up from INR 3.20 trillion notified amount for the December quarter, and INR 4.03 trillion in the year-ago period. As is usual, the spread between state bonds and gilts is likely to widen in the last quarter of the financial year as state borrowing is typically backloaded, dealers said. At auction last week, the 10-year state bonds' spread over the 10-year benchmark gilt was 33-41 basis points.

Foreign portfolio investors' usual buying near the month-end due to the increase in India's weightage on J.P. Morgan's emerging market local currency bond index were not robust, and did not lend cues to gilts, dealers said. However, some large deals in short-term bonds were reported on the Negotiated Dealing System – Order Matching system. The 6.79%, 2027 bond, the 7.38%, 2027 bond and the 7.59%, 2026 bond had the largest trade volumes in the reported deals segment on Monday.

"These short-term bonds are likely being used for equity margining, or an FPI is severely underweight on short-end in India and wants to invest with the index weightage going up," a dealer at a foreign bank said. "The latter is a possibility with very little likelihood."

The turnover for the day was INR 186.05 billion, against INR 399.85 billion on Friday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. Meanwhile, no trades were struck using the wholesale digital rupee pilot Monday, for the third straight day.

OUTLOOK

On Tuesday, 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 in the Indian rupee against the dollar, after it hit a series of record lows last 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 6.74-6.81% during the day.

India Gilts: In thin band; lack of cues, year-end keep volumes muted

MUMBAI--1440 IST--Government bond prices were in a thin band in the absence of significant cues to provide a clear trajectory for gilt yields. Volumes were set for their lowest level in a year as traders were in a holiday mood before the new year, they said.

One area of concern was the weakness in the rupee, with depreciation seen pushing up imported inflation and reducing the attractiveness of India's fixed-income assets to foreign investors. There was panic in the gilt market on Friday after the rupee depreciated sharply to a record low of 85.8075 a dollar. With Reserve Bank of India intervention leading to a recovery, and further dollar sales by the central bank on Monday, even that was not impacting gilt prices, dealers said.

"After Friday's action in the rupee, traders are cautious about how it behaves today (Monday), but maybe it won't impact the market significantly as there is a sense now that the RBI will step in at some point or another," a dealer at a state-owned bank said.

Hopes of a repo rate cut at the Monetary Policy Committee meeting in February could help the debt market to see a pickup in foreign inflows, dealers said. They are counting on a likely moderation in headline CPI inflation in December from the arrival of the kharif crop that could tone down food inflation. Most traders expect gilt prices to rise from current levels, but with no investor demand and trading activity low, dealers said they did not want to take fresh positions.

Foreign banks are likely to pick up gilts when they re-enter the market after year-end holidays later this week. Activity in the gilt market is expected to revive next week when foreign banks will resume their market activity, dealers said. Inflows due to the month-end increase in India's weightage on the J.P. Morgan Government Bond Index – Emerging Markets were not robust, and did not lead to a rise in prices. Short-term gilts, including bonds maturing in 2027, are being favoured by foreign investors, dealers said. 

As the RBI continues to exert pressure on rupee liquidity in the banking system with its dollar sales, traders have mixed views on an open market purchase of bonds by the central bank. Some dealers count on the tool as a necessary step to provide durable support to banking system liquidity. Others remain doubtful, citing the tool as a last resort, which the central bank will utilise after taking into account the impact of the cash it freed up for banks to use last week. The cash reserve ratio of banks has come down to 4% of net demand and time liabilities with the second cut of 25 basis points coming into effect on Saturday. However, the systemic liquidity remained in a deficit at INR 1.83 trillion on Sunday, RBI data showed. 

The market turnover was INR 71.00 billion, lower than INR 266.35 billion at 1330 IST on Friday, 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 6.77-6.81%. (Vidhushi RajPurohit and Aaryan Khanna)

India Gilts: Steady on lack of firm cues; volumes muted near year-end

MUMBAI--1020 IST--Prices of government bonds were steady on Monday as trade volumes were minuscule due to a lack of significant triggers and a lack of participation near the year-end. Traders largely ignored a slight rise in US Treasury yields overnight, dealers said.

"The prices are what they are, but if we look at the volumes, there is practically no trading going on right now," a dealer at a private bank said. "So even with one participant, the price will move, but then nothing major is expected." In the first 20 minutes of trade, the 6.79%, 2034 gilt was a tad up, but only with four trades.

The yield on the 10-year US Treasury note rose 2 basis points overnight to 4.63%, trading around levels last seen in May. While high US yields may prevent a rise in gilt prices, dealers said the domestic 10-year yield was unlikely to rise above the key 6.80% mark due to firm investor appetite. This was seen by the recovery in prices on Friday, when gilts recovered nearly all losses after the benchmark yield rose to a one-month high of 6.82%, they said.

On the domestic front, traders are eyeing any possible announcement of an open market purchase of bonds by the Reserve Bank of India to provide some positive cues to the market. On Friday, the liquidity deficit in the banking system was at INR 1.91 trillion, according to RBI data. Other than that, there was nothing of importance to track, with the rupee also not showing signs of increased weakness on Monday, dealers said. On Friday, it hit a record low of 85.8075 a dollar.

"The steps taken by the RBI to manage liquidity are something that dealers are looking closely at right now, as if it continues to just come with VRRs (variable rate repo auctions), then market can expect some sell-off," a dealer at a primary dealership said.

The market turnover was INR 5.00 billion, lower than INR 23.10 billion at 1030 IST Friday, 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 6.77-6.81%. (Vidhushi RajPurohit)

India Gilts: May open steady with muted volume; seen taking cues from US ylds

MUMBAI – Prices of government bonds may open steady Monday owing to a lack of significant cues, dealers said. During the day, gilt prices are expected to track the movement of US Treasury yields and Indian rupee for any cues.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.77-6.81% compared to 6.79% on Friday. 

The yield on the 10-year US Treasury note was up slightly at 4.63% at 0810 IST from 4.61% at 1700 IST on Friday, trading around levels last seen in May. US yields have been on the rise since the release of the quarterly rate cut projections, which showed that US central bank officials had halved their estimates for the total quantum of rate cuts next year. Traders have also been concerned regarding US President-elect Donald Trump's fiscal policies, which are expected to be inflationary with his plans to impose tariffs and tax cuts in the US. 

The Reserve Bank of India's actions to curb volatility in the domestic currency will be keenly watched by gilt traders, after the rupee's weakness on Friday caused the 10-year gilt yield to shoot up to its highest in a month. On Friday, the rupee recorded its sharpest single-day fall in nearly seven months, settling at 85.5325 a dollar. However, a fall in gilt prices might be limited owing to the absence of foreign banks near year-end. An aggressive selling of the dollar by the central bank to support the rupee could strain the banking system's liquidity, providing hope to traders for an open-market purchase of bonds by the RBI, dealers said. 

However, trade volumes are expected to remain subdued as several traders remain away from desks near the new year. Foreign banks and foreign portfolio investors will also stay away from trading gilts as they close their accounts at the end of the year, dealers said. (Vidhushi RajPurohit)

End

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

Edited by Akul Nishant Akhoury

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