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Informist, Thursday, Jan. 9, 2025

MUMBAI – Prices of most government bonds ended little changed from the previous close, recovering losses earlier in the day after cut-off prices at the gilt buyback auction were slightly better than expected. This, coupled with hopes of the Reserve Bank of India injecting more liquidity into the banking system, helped offset losses, dealers said. 

The 10-year benchmark 6.79%, 2034 bond closed at INR 100.17, or 6.77% yield, compared to INR 100.14, or 6.77% yield, at Wednesday's close. The market was volatile for the third straight day, though volumes eased as traders could not place large gilt bets amid tight liquidity.

The result of the buyback auction was a positive for gilt prices, though the government only accepted INR 192.18 billion worth of offers against the notified INR 250 billion. Some private and foreign banks were likely picking up bonds, after selling gilts earlier in the day. Four of the five bonds bought back had cut-off prices above the indicative price set by Financial Benchmarks India Ltd. on Wednesday, indicating strong demand. The government was expected to continue with buyback auctions in the next two weeks to bring down its gross borrowing for 2025-26 (Apr-Mar), dealers said.

Bond prices were down during the day as the Reserve Bank of India's net liquidity injection – a proxy for the systemic liquidity deficit – rose to INR 1.82 trillion on Wednesday, and the liquidity crunch remained on Thursday, driving up overnight money market rates. Nearing the end of trading hours, bond traders placed bets that the RBI would add durable liquidity into the banking system either through open market operations or other measures, as central bank officials were meeting treasury officials after market hours, dealers said.

"The RBI will announce some liquidity measure, maybe OMO (open market operation) after this meeting. So market is excited, that's why prices are up now," a dealer at a state-owned bank said. "Even the good buyback result has helped."

Some state-owned banks were underwhelmed with the buyback auction result, as the RBI only accepted INR 192.18 billion worth of offers of the total bids worth INR 457.10 billion. To prevent losses on two COVID-19 era issuances – the 5.15%, 2025 gilt and the 5.22%, 2025 gilt – which were trading below par value, traders avoided tendering the bonds, or had offered them to the government at prices much higher than indicative levels on Wednesday. 

Traders said tight liquidity conditions may be engineered by the RBI to limit the rupee's fall against the dollar. On Thursday, the rupee fell to a fresh lifetime low of 85.9325 against the dollar. The continuous fall in the local currency also may have spurred foreign banks to trim holdings in gilts, after buying bonds to build up trading positions earlier this week, dealers said.

The persistent tight liquidity – the RBI has had to net inject liquidity every day since Dec. 13 – has come as a surprise to traders, as it is driving costs of leveraged buys higher. Traders expected the RBI to anchor the weighted average call rate near the policy repo rate of 6.50% after its Monetary Policy Committee softened its stance to 'neutral' from 'withdrawal of accommodation' in October. On Thursday, the weighted average call rate was at 6.83%, and the weighted average triparty repo rate was at the Marginal Standing Facility rate of 6.75%. The market repo weighted average rate was also at 6.87%, above the yield on the benchmark 6.79%, 2034 gilt.

State-owned banks' purchases limited losses in bond prices, along with the overnight softening in US yields. The 10-year benchmark yield hit 6.78% as prices fell, a level that traders betting on a repo rate cut in February said was lucrative. This led to traders paying short-term overnight indexed swap rates, which shot up and weighed on gilt prices, dealers said. 

Bond prices were largely steady in a choppy trading session in the initial hours of trade. However, sales by foreign and private banks dragged prices down as the rise in the 10-year US Treasury note to around 4.73% overnight spooked some traders. Traders fear the US yield could rise to 4.90% later this month, as Donald Trump takes office as US President on Jan. 20. Trump's proposed economic policies on the campaign trail are seen as inflationary, slowing down the pace of rate cuts in the US. Some traders also placed short bets on gilts with the view that non-farm payrolls data in the US, scheduled post-market hours Friday, will print higher than consensus estimates. 

"US yields have been continuously rising. Yesterday (Wednesday), there was a 10-year Treasury note auction which was badly bid because of Trump fears," a dealer at a private bank said. "Traders are anxious about this rise, so they're exiting positions."

Trading volume for the day was INR 426.55 billion, down from INR 548.05 billion Wednesday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot for the tenth straight day.

OUTLOOK

On Thursday, bond prices may open steady on caution before the INR 220-billion weekly gilt auction, dealers said. The government will sell INR 70 billion of the 6.64%, 2027 bond and INR 150 billion of the 7.34%, 2064 bond. Demand for both bonds is expected to be firm. 

The overnight movement of US yields will likely be muted as US markets are shut on Thursday to mourn the loss of former US president Jimmy Carter. During the day, prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar, dealers said. On Thursday, the domestic currency fell to a record low of 85.9250 against the dollar. The RBI's intervention in the foreign exchange market with dollar sales to support the rupee has put further strain on liquidity in the banking system, which makes a stronger case for open-market purchase of gilts by the central bank, dealers said.

The delay in these operations has disappointed some traders. With several banks meeting RBI officials after market hours Thursday to speak on liquidity and the foreign exchange market, more traders are hopeful the central bank will durably infuse liquidity soon.

Towards the end of trade, dealers will also start taking positions ahead of India's CPI inflation data for December, due Monday. Some traders also expect the RBI to announce another gilt buyback by the government after market hours. Data on the RBI's open market operations will also be keenly watched. Offshore, the US non-farm payrolls data for December is seen as a key interest rate cue for the Federal Open Market Committee's rate decisions.

Traders will also track the number of human metapneumovirus, or HMPV, cases in the country, with eight cases confirmed by the central government Thursday. 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.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.72-6.85% during the day.

India Gilts: Recover losses as buyback result in line with view, demand firm

MUMBAI--1623 IST--Government bond prices recovered losses due to firm demand, likely from state-owned banks, and as the results of the buyback auction Thursday were on expected lines, dealers said. There was little room for placing large bets amidst the tightened liquidity conditions, and traders also refrained from picking up bonds ahead of the weekly gilt auction Friday.

The government bought back gilts worth INR 192.18 billion at the auction. The auction received bids worth INR 457.10 billion, almost double the notified amount of INR 250 billion. Four of the five bought-back bonds had cut-off prices above the indicative price set by Financial Benchmarks India Ltd. on Wednesday, indicating strong demand. The government accepted lower bids than some traders had expected, dealers said. The demand at the buyback was driven by domestic banks, in a bid to generate cash as the overnight borrowing rates were well above the policy repo rate of 6.50%, dealers said. 

"I think the PSU demand has rescued the market today (Thursday), but if liquidity conditions don't get better the pressure on G-sec prices will continue," a dealer at a private bank said.

Dealers said that primary dealerships and foreign portfolio investors likely shed stocks during the day. Some selling from foreign banks was also likely seen, due to client outflows, even as they had started building long positions on bonds due to improved risk appetite in the new year, dealers said.

The market turnover was INR 380.38 billion, against INR 497.20 billion at 1630 IST on Wednesday, 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 6.74-6.80%. (Vidhushi RajPurohit)

India Gilts: Down as liquidity conditions tighten; fall in rupee weighs

MUMBAI--1345 IST--Government bond prices were down because liquidity conditions in the banking system tightened, which limited the ability of domestic market participants to buy bonds, dealers said. Some traders also shed their gilt holdings to generate cash, with money market rates making leveraged investments prohibitively expensive.

On Wednesday, the net liquidity injected by the Reserve Bank of India--a proxy for the systemic liquidity deficit--rose to INR 1.82 trillion from INR 1.44 trillion on Tuesday. Consequently, the weighted average call rate was at 6.90%, and the weighted average triparty repo rate was at the Marginal Standing Facility rate of 6.75%. The market repo weighted average rate was also at 6.87%, above the yield on the 10-year benchmark 6.79%, 2034 gilt.

Traders expect the liquidity to remain in deficit this month unless the RBI intervenes with some durable tool to support the liquidity. Some traders hope the central bank to announce an open market purchase of gilts through auction, though they said tight liquidity conditions may be engineered by the RBI to limit the rupee's fall against the dollar. On Thursday, the rupee fell to a fresh lifetime low of 85.9325 against the dollar. 

"RBI tried to soften the (liquidity) crunch by the CRR (cash reserve requirement) cut in December, and now it has come up with a buyback auction so it is working towards improving it, but the falling currency is adding further pressure," a dealer at a primary dealership said.

The buyback of five gilts on Thursday is expected to add around INR 250 billion to the banking system, but dealers expect the government to come up with more auctions as it might aim to reduce its gross borrowing amount for 2025-26 (Apr-Mar). Traders expect the government to pick up gilts worth more than INR 200 billion at the auction, with banks enthusiastic to tender the bonds at a profit while also generating liquidity.

The RBI's lack of liquidity infusion has also disappointed traders--Thursday's INR 500 billion variable rate repo auction did little to ease rates, with the weighted average rate at auction 6.66%. Gilts prices are tracking the movement of overnight indexed swap rates as traders are paying in swaps owing to a rise in the Mumbai Interbank Offer Rate, dealers said. The liquidity crunch in the banking system has led to an increase in the MIBOR, with the overnight rate inching close to 7% over the last three days. On Thursday, the one- and two-month swap rates were up 5 basis points to 6.79% and 6.72%, respectively, while the benchmark 1-year OIS was up 3 bps to 6.53%.

"If the MIBOR rates are close to 7% then there is no sense in receiving in OIS, so traders will pay there and tracking that gilt prices will be under pressure as what we are looking right now," a dealer at a primary dealership said.

The market turnover was INR 259.40 billion, against INR 275.60 billion at 1330 IST on Wednesday, 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 6.74-6.80%. (Vidhushi RajPurohit)

India Gilts: Little changed in choppy trade; buyback result to lend direction

MUMBAI--1020 IST--Government bond prices were little changed from the previous close in choppy early trade ahead of the government's buyback auction at 1030-1130 IST.  A fall in the rupee against the dollar exerted pressure, while easing of US Treasury yields overnight served to reduce the selling pressure in the gilts market seen near the end of trade Wednesday, dealers said.

"The cooling off of US yields helped the prices of gilts to inch up today (Thursday), but broadly the prices will be range-bound during the day," a dealer at a primary dealership said. "Later, the movement of prices will be dependent on the result of the buyback auction as we will get to know what is the appetite of the government." 

At the auction, the government will buy back the 7.72%, 2025 bond; the 5.22%, 2025 bond; the 8.20%, 2025 bond; the 5.15%, 2025 bond; and the 7.59%, 2026 bond. Traders expect the government to pick up nearly the entire notified amount, as most banks will tender the papers at levels notified on Wednesday by Financial Benchmarks India Ltd. Traders expect more bids to be tendered in the 5.22%, 2025, 5.15%, 2025 and 7.59%, 2026 papers as these have the largest outstanding among the bonds at the auction, dealers said.

The amount of bids accepted by the government will signal to the market expectations of further buybacks, which depend on the government's cash balance. Dealers expect prices to pick up if the government accepts bids near the notified amount, which is seen showcasing its intention to reduce its gross borrowing in 2025-26 (Apr-Mar). Banks seek to sell the bonds to the government at yields lower than the 182-day and 364-day Treasury bill yields, and plan to pick up the short-term papers in the secondary market, dealers said. 

During the day, prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar, dealers said. On Thursday, the domestic currency fell to a record low of 85.9250 against the dollar. The RBI's intervention in the foreign exchange market with dollar sales to support the rupee has put further strain on liquidity in the banking system, which makes a stronger case for open-market purchase of gilts by the central bank, dealers said. However, some traders were disappointed that the RBI has not announced an open market purchase auction despite systemic liquidity being in deficit for nearly a month and their takeaway was the central bank was reluctant to undertake large bond buys.

The market turnover was INR 58.00 billion, against INR 87.30 billion at 1030 IST on Wednesday, 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 6.74-6.80%. (Vidhushi RajPurohit)

India Gilts: Seen tad up as US yields ease; buyback auction in focus

MUMBAI – Prices of government bonds may open slightly higher following the slight moderation of US Treasury yields overnight, dealers said. Gains may be limited until after the government's INR 250-billion bond buyback at 1030-1130 IST.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.74-6.80% compared to 6.77% on Wednesday. Dealers expect the prices of gilts to be volatile during the day, as traders will eye both the movement of US yields and the result of the buyback auction. 

The government will buy back the 7.72%, 2025 bond; the 5.22%, 2025 bond; the 8.20%, 2025 bond; the 5.15%, 2025 bond; and the 7.59%, 2026 bond at the auction. The previous buyback for these bonds in October saw the government purchase nearly the entire notified amount of INR 250 billion. Dealers expect the government to announce at least one more buyback of a similar size with the bonds on offer, though they said the result of Thursday's auction may guide the government's actions. 

Meanwhile, the benchmark 10-year US yield cooled slightly to 4.68% at 0740 IST after rising to 4.71%, the highest level since Apr. 26, at the end of Indian market hours Wednesday. The rise in US yields had led to a fall in gilt prices towards the end of trade on Wednesday. The minutes of the Federal Reserve's December meeting also revealed growing concerns around sticky inflation, which might lead to fewer rate cuts this year. (Vidhushi RajPurohit)

End

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

Edited by Tanima Banerjee

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