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Informist, Friday, Jan. 10, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds slipped near the end of trading hours, after trading largely steady through the day. Traders placed short bets on expectations that the US employment report, due at 1900 IST, would weaken the case for rate cuts in the world's largest economy, dealers said. A rise in US Treasury yields late in the day also weighed on prices. 

The 10-year benchmark 6.79%, 2034 bond closed at INR 100.11, or 6.77% yield, compared to INR 100.17, or 6.76% yield, at Thursday's close. Two-way trade continued, as seen during the entire week, but prices remained in a relatively thin band on caution before key data points, dealers said.

The sales were led by private banks and foreign banks, as the yield on the 10-year US Treasury note rose to 4.70% at 1700 IST, up 2 basis points from earlier in the day. Traders placed short bets that US non-farm payrolls in December, a key data point for the US Federal Open Market Committee's rate decisions, would be higher than the consensus estimate of around 155,000 jobs.
 

"The market expects NFP (non-farm payrolls) to print at 165,000, but some traders are even saying 180,000-200,000, so those who have UST-based (US Treasury-based) positions are selling before it," a dealer at a state-owned bank said. 

The weekly INR 220 billion bond sale sailed through, and the strong demand at the auction temporarily resulted in a slight rise in bond prices. However, cut-off prices were on expected lines and failed to lend significant direction to the secondary market, especially as both the 6.64%, 2027 gilt and the 7.34%, 2064 bond on offer are not widely traded, dealers said.

For the 7.34%, 2064 bond, private and state-owned insurance companies were the major bidders, dealers said. Provident funds also picked up the paper, they said. Bids of up to INR 40 billion for the 40-year benchmark bond may have been to fulfil banks' bond forward-rate agreements with life insurance firms and also for the 2064 bond's zero-coupon Separate Trading of Registered Interest and Principal of Securities instruments, dealers said.

Gains in bond prices were erased as the US payroll data got closer, and after data showed that India's industrial growth rose to a six-month high of 5.2% in November. A fall in rupee to a record low of 85.9700 to a dollar also weighed on gilt prices, as it dampened the outlook for purchases by foreign investors, dealers said. A falling rupee reduces the forex-adjusted returns on rupee-denominated assets such as gilts. FPIs have sold INR 34.10 billion worth of fully accessible route bonds so far in 2025, according to Clearing Corp. of India data at 1820 IST.

Near the day's low, state-owned banks considered gilt prices lucrative as they expected the RBI's Monetary Policy Committee to cut the policy repo rate by 25 basis points at its next meeting in February on account of slowing growth and falling inflation. This limited the fall in gilt prices by the end of the day, dealers said.

CASE FOR SHORT-TERM BONDS

At the auction, domestic banks bid higher than the indicative price published by Financial Benchmarks India Ltd. on Thursday for the 6.64%, 2027 bond, showing significant appetite as the bond matches their liabilities. Mutual funds also picked up the three-year bond, dealers said. Foreign banks also bid for the short-term paper, but at lower price levels than domestic traders, they said.

Banks picked up the 3-year paper ahead of the RBI's implementation of the liquidity coverage ratio guidelines, which propose higher run-off scores assigned to internet-linked deposits. This will require banks to hold more High-Quality Liquid Assets, such as government bonds, to maintain their current levels of liquidity coverage. After the auction, Informist exclusively reported that the liquidity coverage ratio norms, which were set to kick in from Apr. 1, may be delayed due to a change in the helm of the Reserve Bank of India and a pushback from the government.

The price of the five-year benchmark 7.04%, 2029 gilt fell slightly after the report as the requirement for these bonds would be reduced if the new norms are delayed. However, consistent purchases in these tenures by FPIs, along with hopes of a rate cut by the MPC in February may prevent sharp losses in the rate-sensitive tenures, dealers said. Moreover, bank treasuries had not bought bonds aggressively to fulfil the proposed liquidity coverage ratio requirements on expectations that the guidelines would be delayed or junked entirely.

"For the past few days, FPIs have been net sellers, but I got some quotes from them today (Friday) in the shorter-tenure," a dealer at a primary dealership said. Clearing Corp. of India data at 1820 IST showed FPIs bought INR 3.06 billion of fully accessible route bonds on Friday.

VOLATILE WEEK
Bond prices have been see-sawing this week, as positive domestic cues were weighed down by global factors. The 10-year gilt yield ended little changed for the week, after falling to a three-week low of 6.73% on Tuesday. While US Treasury yields have been rising ahead of Donald Trump's inauguration on Jan. 20, a jump in crude oil prices also weighed on bond prices. Brent crude for March delivery approached $80 a barrel for the first time since mid-2024, despite the modest outlook for crude oil demand.

Earlier in the day, bond prices were up due to hope that the Reserve Bank of India may introduce some durable measures to boost the banking system liquidity. Treasury officials told Informist that select banks and primary dealers met central bank officials on Thursday and suggested open market operations, a cut in cash reserve ratio and long-term dollar-rupee buy-sell swaps as possible durable measures for liquidity injection, sources said. On Thursday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 2.01 trillion from INR 1.82 trillion on Wednesday.

Trade volumes fell due to a lack of significant cues on Friday and caution ahead of key data points. Trading volume for the day was INR 353.85 billion, down from INR 426.55 billion Thursday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There was no trade using the wholesale digital rupee pilot for the eleventh straight day.

OUTLOOK 

The gilt market is shut on Saturday. On Monday, bond prices may take cues from the movement in US yields after the release of US non-farm payrolls data for December post market hours. The payrolls grew by 256,000, against a consensus estimate of 155,000. Any geopolitical cues over the weekend or a further rise in crude oil prices above $80 a barrel will also impact gilt prices on Monday.   

Dealers will also start taking positions ahead of India's CPI inflation data for December, due at 1600 IST Monday. According to an Informist poll, inflation is seen falling to a four-month low of 5.3% in December from 5.48% in November.

During the day, prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar, dealers said. The domestic currency fell to a record low against the dollar on Friday. 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.

Traders will also track the number of human metapneumovirus, or HMPV, cases in the country, with eight cases confirmed by the central government on 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 6.74-6.82% during the day.

India Gilts: In thin band; briefly up after auction result showed firm demand 

MUMBAI--1523 IST--Prices of government bonds were up briefly after the weekly bond auction showed strong demand from banks as well as investors, but the price gains were erased shortly afterwards, dealers said. The auction result was along expected lines, but traders said they were cautious of placing large bets before key data points.

Domestic banks bid higher for the 6.64%, 2027 bond than the indicative price set by Financial Benchmarks India Ltd. on Thursday, showing significant appetite as the bond matches their liabilities. Mutual funds also picked up the three-year bond, dealers said. Foreign banks were also bidding for the short-term paper, but at lower price levels than domestic traders, they said.

For the 7.34%, 2064 bond, private and state-owned insurance companies were the major bidders, dealers said. Provident funds also picked up the paper, dealers said. Bids of up to INR 40 billion for the 40-year benchmark bond may have been to fulfil banks' bond forward-rate agreements with life insurance firms, and also for the 2064 bond's zero-coupon Separate Trading of Registered Interest and Principal of Securities instruments, dealers said.

"Demand at auction was good, but volumes in secondary (market) are so low because we need a firm trigger. Till then, traders are indecisive, (causing) lot of intraday volatility," a dealer at a state-owned bank said.

The release of November's Index of Industrial Production is due at 1600 IST. After market hours, traders await the Reserve Bank of India's weekly statistical supplement, which will show whether the RBI purchased gilts in the secondary market last week. Some traders expected purchases worth at least INR 10 billion in the week ended Jan. 3, while others were pessimistic about any number above the RBI's last purchase of INR 200 million in the week ended Dec. 27.

Private banks are likely to have trimmed their stock of bonds ahead of the US employment report for December, which includes the monthly non-farm payrolls data. Traders expect a sell-off in the gilt market, particularly from foreign portfolio investors, as US Treasury yields may rise if jobs added exceed The Wall Street Journal's estimate of 155,000, dealers said. Some traders expect bond prices to fall by the end of trading hours before the US data print.

The market turnover was INR 269.30 billion, against INR 289.45 billion at 1530 IST Thursday, 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%.  (Cassandra Carvalho)

India Gilts: Largely steady on caution ahead of weekly gilt auction

MUMBAI--1020 IST--Government bond prices were largely steady ahead of the weekly gilt auction for INR 220 billion. Expectations of improved liquidity conditions in the banking system led to some purchases by state-owned banks, dealers said.

"During the day, prices will stay consolidated as there is a wait in the market for upcoming data points," a dealer at a state-owned bank said. "Later, when the result of the auction is out, we may see some positioning in the market ahead of the CPI data print."

The government will sell INR 70 billion of the 6.64%, 2027 bond and INR 150 billion of the 7.34%, 2064 bond. Dealers expect demand for both bonds to be firm at the auction. They expect bids from banks for the 2027 bond to manage their asset-liability. The 2064 bond is expected to be picked up by investors at life insurance firms and pension funds. The large quantum of the 40-year benchmark gilt may weigh on the cut-off prices, dealers said.

After the auction result, traders are expecting some volatility in the market as dealers might place bets ahead of India's CPI print for December, due on Monday. Traders expect prices to remain slightly higher during the day due to hope that the Reserve Bank of India may introduce some durable measures to support banking system liquidity. Treasury officials told Informist that select banks and primary dealers met central bank officials on Thursday after market hours in this regard.

The market suggested open market operations, a cash reserve ratio cut and a long-term dollar-rupee buy-sell swap among the durable measures for liquidity injection, sources said. On Thursday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 2.01 trillion against INR 1.82 trillion on Wednesday.

"After yesterday's meeting we are hoping that the RBI will come up with an OMO (open market operation) to infuse durable liquidity, so that will be a positive for the gilt market," a dealer at a primary dealership said.

The market turnover was INR 58.00 billion, against INR 87.30 billion at 1030 IST on Thursday, 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 steady on caution ahead of weekly gilt auction

MUMBAI – Prices of government bonds are seen opening steady ahead of the INR 220-billion weekly gilt auction at 1030-1130 IST, dealers said.  The Reserve Bank of India's announcement of a large variable rate repo operation may aid prices of short-term bonds, though traders are looking for more durable measures of liquidity infusion.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.73-6.81% compared to 6.76% on Thursday. Gilt prices may also track the movement in the rupee, after consistent weakness in the Indian unit has spurred sales from foreign portfolio investors, 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. Dealers expect demand for both bonds to be firm at the auction. The shorter-tenure, 2027 bond will likely be picked up by domestic traders for their asset liability management. For the longer-tenure paper, demand is expected from life insurance firms and pension funds, dealers said. 

Meanwhile, traders said the immediate cash crunch in the banking system may be met by the RBI's 14-day, INR 2.25-trillion variable rate repo. The lack of liquidity had weighed on gilt prices and led to short-term overnight indexed swap rates shooting up on Thursday. Traders are hopeful of durable measures on liquidity infusion after treasury officials met central bank officials on Thursday after market hours.

Bond prices will be sensitive to the movement of the Indian rupee against the dollar. On Thursday, the domestic currency fell to a lifetime low of 85.9325 against the dollar before settling at a record closing low of 85.8475. 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. With the weakness in the rupee, FPIs have sold INR 48.88 billion of fully accessible route gilts between Tuesday and Thursday.  (Vidhushi RajPurohit)

End

US$1 = INR 86.97

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

Edited by Saji George Titus

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