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Informist, Tuesday, Jan. 7, 2025

By Cassandra Carvalho

MUMBAI – Government bonds lost all gains notched up during the day after the advance estimate on India's GDP growth for 2024-25 (Apr-Mar) turned out to be higher than what some sections of the market had expected, dealers said. The first advance estimate released by the statistics ministry today placed GDP growth for the current financial year at a four-year-low of 6.4%, in line with analysts' expectations, but bonds had priced in the possibility of an even weaker reading in the 5.5-6.0% range. 

The 10-year benchmark 6.79%, 2034 bond closed at INR 100.28, or 6.75% yield, flat compared to Monday's close. During the day, the benchmark had climbed to a high of INR 100.41 or 6.7300% yield in anticipation of a weak GDP print.

"PSBs (state-owned banks) had slightly higher estimates, but foreign (banks) and privates (banks) had much lower expectations because they clearly positioned earlier," a dealer at a state-owned bank said. "They're undoing their positions now," the dealer said.

Foreign banks were the largest buyers of gilts on Monday, with a net purchase worth INR 35.45 billion. They were followed by primary dealers, which net bought gilts worth INR 17.71 billion, data released by Clearing Corp of India showed.

Traders had hoped that another disappointing GDP growth estimate would cement the case for a 25-basis-point rate cut by the Reserve Bank of India's Monetary Policy Committee in February. While rate cut hopes did not fade post the data, traders unwound their bets as they did not get the conviction they had hoped for. However, the positive takeaway for bond dealers was that the country's growth this fiscal year would likely undershoot the RBI's revised projection for FY25. The RBI had in December cut down its GDP growth projection for FY25 to 6.6% from 7.2% earlier. India's GDP growth slowed to a seven-quarter low of 5.4% in Jul-Sept, which had ignited gilt traders' hopes of a rate cut in February. 

Bond prices rose during the day, with the benchmark touching price levels last seen on Dec. 16. The price rise was likely on bets by foreign banks on expectations of a low GDP growth print, dealers said. The gilt purchases by foreign banks on Monday came despite a depreciating rupee and an upward pressure on US Treasury yields, both of which are typically cues for foreign players to sell. After a lull in their trading activity towards the end of 2024, foreign banks have regained a strong appetite for bonds despite sales by foreign portfolio investors, dealers said. 

"Foreign banks have been buying both in gilts and (receiving) in OIS, because now it's a fresh (financial) year for them, so they have an aggressive risk appetite. They have probably been buying on today's (Tuesday's) data and Feb rate cut bets (by the MPC)," a trader at a primary dealership said. "They may be frontrunning before the FPIs (foreign portfolio investors)." Some foreign exchange traders cited FPI buys in India's debt as a reason for a rise in the rupee against the dollar Tuesday.

Gilt prices were also buoyed by the government's upcoming buyback of five gilts worth INR 250 billion through an auction on Thursday. Traders were increasingly of the view that the government would not be able to meet its budgeted spending, and would either lower its borrowing outright or continue to extinguish near-term maturities through buybacks for the rest of this financial year. The fiscal restraint by the government also made the case stronger for repo rate cuts, dealers said.

The rise in bond prices earlier in the session, however, was capped as state-owned banks sold bonds at a profit, as the levels, not seen in almost a month, were lucrative to them, they said. 

Cut-offs at the state bond auction held during the day were along expected lines, with states cumulatively raising INR 195.25 billion. However, Karnataka only partially alloted both its bonds on offer, likely because some bids by state-owned banks were less aggressive than expected, dealers said. At the day's price high, the spread between the benchmark 10-year gilt and the 10-year state bonds auctioned Tuesday widened to 42 bps. 

Trading volume for the day rose sharply to INR 836.25 billion from INR 622.25 billion on Tuesday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. Volume escalated after the GDP data release at 1600 IST, as traders trimmed their holdings. There were no trades using the wholesale digital rupee pilot for the eighth straight day. 

OUTLOOK

On Wednesday, bond prices may take cues from the overnight movement of US Treasury yields after the release of the US Job Openings & Labor Turnover Survey for November and the comments of US Federal Reserve Bank of Richmond President Thomas Barkin post Indian market hours, dealers said. While traders expect a further fall in prices after the GDP data release, a fall in US yields could reverse the price movement. Bond prices will remain data-dependent for the rest of the week, with a slew of US jobs data lined up, including non-farm payrolls numbers. The US Federal Open Market Committee's December meeting minutes are also awaited.

Traders will also track the number of Human Metapneumovirus (HMPV) cases in the country, with seven cases confirmed by the central government on Tuesday. Any shutdown or slowing of economic activity, similar to lockdowns seen during the COVID-19 pandemic, would see a rise in gilt prices as the RBI could cut rates sooner to aid economic growth. 

During the day, gilt prices will also track the movement in the Indian rupee against the dollar, after it hit a record closing low for the tenth straight session Monday. Any major geopolitical developments and a further rise 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 6.70-6.80% during the day.

India Gilts: Off highs as FY25 GDP estimate fails to firm Feb rate cut bets

MUMBAI--1610 IST--Prices of government bonds were off highs after the first advance estimate for India's GDP growth in 2024-25 (Apr-Mar), published at 1600 IST, matched analysts' expectations. Traders had positioned for a lower reading, which could have made a stronger case for repo rate cuts in India starting in February, dealers said.

The government's forecast for India's GDP growth in FY25 came at a four-year low of 6.4%, in line with the median of an Informist poll, and only slightly below the Reserve Bank of India's 6.6% forecast. However, some traders had placed bets on a reading as low as 5.5% for the full fiscal year. India's GDP growth slowed to a seven-quarter low of 5.4% in Jul-Sept.

A sharp slowdown in economic activity in the second half of 2024 dragged the full-year growth estimate down to its lowest level since the contraction witnessed in the pandemic-hit FY21. Post the release, expectations of a rate cut by the Monetary Policy Committee at its February meeting are still on the table, but traders didn't get as much certainty as they hoped for to cement their positions on that view, dealers said. 

"The market had already priced in even a 6.00% reading with the rally in the past two days," a dealer at a state-owned bank said. "Whoever had placed bets on that range is now selling." At the day's high, the 10-year bond's price had risen over 50 paise from Friday's lows.
 

The market turnover was INR 746.75 billion, against INR 494.45 billion at 1630 IST on Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.77%. (Cassandra Carvalho)

India Gilts: Remain up; PSU banks likely selling bonds at profit, cap gains

MUMBAI--1415 IST--Government bond prices remained up Tuesday, but gains were capped due to likely profit booking by state-owned banks as the yield on the 10-year benchmark 6.79%, 2034 gilt touched its lowest level since Dec. 16, dealers said. Bond prices have shot up over the last two days due to the revival of foreign banks' buys after being absent at the end of 2024, on hopes of a rate cut in India in February.

Dealers expect India's GDP growth to be below the Reserve Bank of India's projection of 6.6% in the current financial year ending March, thereby upping their hopes of a repo rate cut at the RBI's Monetary Policy Committee meeting in February. India's GDP growth may have moderated to a four-year low of 6.4%, according to an Informist poll. The first advance estimate for GDP is scheduled to be announced at 1600 IST Tuesday.

"There was no sudden trigger in the market that made the price jump. It's just the addition of all the upcoming positives that the foreign banks are right now trying to build their positions on," a dealer at a primary dealership said. 

Gilt prices were also buoyed by the government buying back five gilts worth INR 250 billion at the auction Thursday. Traders were increasingly of the view that the government would not be able to meet its budgeted spending, and would either lower its borrowing outright or continue to smoothen near-term maturities through buybacks for the rest of 2024-25 (Apr-Mar) and even in the Union Budget for FY26. This also made the case stronger for repo rate cuts, dealers said.

"Food prices have begun to fall, growth indicators have improved since September but still below June levels, and tax revenue growth is softening and may limit government expenditure in FY26," HSBC's economists said in a note Tuesday. "All of this suggests that the onus of supporting growth will fall on monetary policy easing; we expect two rate cuts of 25bp (basis points) each delivered in February and April."

Trade volumes also remained up Tuesday owing to two-way activity, with buys due to the positive cues and sales at levels considered lucrative, dealers said. Some traders speculated foreign portfolio investors were picking up gilts as the rupee depreciation has been moderate in the past few days. Some foreign exchange traders cited FPI buys in India's debt as a reason for a rise in the rupee against the greenback Tuesday. Moreover, traders do not expect the 10-year US Treasury yield to rise above the 4.65% level, at least until Donald Trump assumes office as US President on Jan. 20, dealers said. 

The market turnover was INR 545.55 billion, against INR 308.90 billion at 1430 IST on Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.77%. 

India Gilts: Up; domestic optimism on supply, rates outweighs US yield rise

NEW DELHI--1020 IST--Government bond prices rose on optimism on both domestic gilt supply and interest rates ahead of the Union Budget and the monetary policy review in February, dealers said. This outweighed the impact of an overnight rise in US Treasury yields, dealers said.

The government's bond buyback this week led to optimism on its fiscal position due to lower spending, with all bonds the government has offered to buy maturing in 2025-26 (Apr-Mar), dealers said. Traders expect another INR 250-billion buyback later this month, after the one of the same quantum on Thursday. The success of auctions will directly drive down gross borrowing in the next financial year. Some traders were selling bonds of 2030 and 2031 maturity as they were disappointed with the buyback and had expected the Reserve Bank of India to buy bonds of longer tenures, including seven years, at an open market operation purchase auction, dealers said.

State-owned banks were likely on the selling side, booking profits on buys over the past three weeks – the 10-year gilt yield is at its lowest since Dec. 18. This led to a spike in trade volume Tuesday. Despite slight net sales from foreign portfolio investors in fully accessible route bonds, foreign banks were net buyers on Monday, according to Clearing Corp. of India data. This led to less concern about persistently high US Treasury yields, which have not risen much for the last two weeks, dealers said.

Moreover, traders bet on the government's first advance estimate of GDP growth to show a print that would make a case for the RBI's Monetary Policy Committee to cut rates in February, dealers said. Traders were of the view the 10-year gilt above 6.75% yield is lucrative as the bond's yield is expected to go down by at least 10 basis points should the MPC cut rates by 25 basis points in February, if there were no other negative surprises. The connection between domestic and global cues may be skewed even further until the end of the month, they said.

"The narrative on slowing growth has been doing the rounds since December, but because of a lack of volume then, the market has not been able to position on it," a dealer at a primary dealership said. "That's why you have foreign banks buys, and domestic traders also joining in. I think for FPIs, its only a matter of time."

The market turnover was INR 218.85 billion, against INR 71.65 billion at 1030 IST on Monday, according to data on the Reserve Bank of India's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 6.79%, 2034 bond is seen at 6.72-6.77%.  (Aaryan Khanna)

India Gilts: Seen down as US ylds inch up; FY25 GDP growth estimate awaited

NEW DELHI – Prices of government bonds are likely to open lower due to a rise in US Treasury yields after US President-elect Donald Trump refuted a key report that led to a rise in gilt prices on Monday, dealers said. On the domestic front, traders look ahead to the first advance GDP growth estimate for 2024-25 (Apr-Mar) that the government is scheduled to release at 1600 IST. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.73-6.79%, compared to 6.75% on Monday.

The benchmark gilt yield had ended at its lowest since Dec. 18 after a spurt of buying late in the day following a Washington Post report, which said Trump's tariffs may be limited to certain strategic sectors. The report, citing Trump's aides, eased fears of higher inflation in the US economy following the imposition of the tariffs. However, Trump on Monday denied the report that his team was considering paring back the global tariffs he had promised on the campaign trail to his presidency. 

The yield on the 10-year US Treasury note rose to 4.62% at 0815 IST from 4.60% at the end of Indian market hours Monday, driven higher by Trump's comments, concerns of fewer rate cuts in the US as disinflation stalls, and higher bond supply this week. 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.

The fall in gilts may be limited due to the significant amount of short positions squared off on Monday, and these may not return immediately until there is clarity on tariffs. Moreover, other positives--such as a buyback auction of INR 250-billion worth of gilts on Thursday and hopes of a repo rate cut by the Reserve Bank of India's Monetary Policy Committee in February--will likely keep bonds well bid as prices fall, dealers said. 

"More than anything, I think people will be looking to reverse the jump in the last half an hour on Monday," a dealer at a primary dealership said. "So we are still likely to find support around INR 100.10-100.15 (on the 6.79%, 2034 bond)." The 10-year benchmark gilt ended at INR 100.28 Monday.

Some dealers are also likely to pick up bonds, betting that the government's estimate for FY25 GDP growth will be lower than the median 6.4% growth seen in an Informist poll, already a four-year low. However, dealers said that positioning ahead of the data point may be limited, and the market could be volatile after the release of the data at 1600 IST, dealers said. 

Meanwhile, 10 states will raise INR 215 billion via bond sales in the first state government security auction on Jan-Mar, at 1030-1130 IST. While the bumper indicative calendar of INR 4.73 trillion weighed on gilt prices when announced, the auction Tuesday is lower than the calendar's INR 370 billion slated for this week, which could lead to firm demand, dealers said.  (Aaryan Khanna)

End

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

Edited by Saji George Titus

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