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Informist, Monday, Jan. 13, 2025

By Srijita Bose

MUMBAI – Government bond yields ended sharply higher on Monday after the yield on the 10-year US Treasury note rose to an over 14-month-high of 4.79% as data showed a resilient economy. A sharp fall in the rupee to a record closing low against the dollar also triggered traders to sell gilts as rate cut expectations in India faded, dealers said.

The 10-year benchmark 6.79%, 2034 bond closed at INR 99.57, or 6.85% yield, compared to INR 100.11, or 6.77% yield, at Friday's close. The yield on the 10-year benchmark gilt rose nearly 8 basis points, jumping the most intraday since Jun. 4. The yield ended at its highest since Nov. 22.

"The bearish sentiment in the market still persists. There is a lot of uncertainty in the coming weeks and the continuous fall in the rupee surely does not bode well for the market," a dealer at a private bank said. "The big event ahead is (US president-elect Donald) Trump's swearing in (on Jan. 20) and before that everyone is very closely tracking any movement in the US yields."

Trump's policies are seen as inflationary, which will likely push back rate cuts by the US Federal Open Market Committee. Dealers await his tariff policy after he assumes office, which could have an impact on emerging markets. Foreign portfolio investors likely sold gilts as the yield differential between the US and India 10-year benchmark government bonds fell to a little over 200 basis points, the lowest in two decades, dealers said. 

A strengthening dollar index pulled the rupee to its lifetime low of 86.5900 a dollar, and the fast-depreciating currency would also reduce foreign investors' dollar-denominated returns, dealers said. In addition, the higher cost of hedging due to a rapid increase in dollar/rupee near-term forward premiums had made incremental investment limited.

Dealers said stop-losses were triggered early in the day after the 10-year gilt yield topped 6.80%, which led to a sharp move up in the benchmark yield after a modest opening rise. State-owned banks were, however, likely buyers as the yield on the 6.79%, 2034 bond neared 6.85%, its highest in over a month.

Rate cut hopes from the Reserve Bank of India's Monetary Policy Committee in February also dwindled after the rupee ended at a record closing low of 86.5750 a dollar on Monday, falling 0.7%, dealers said. The rupee has fallen 1.1% already in January, even ahead of Trump's inauguration. In the 12 months to October-end, the rupee had only fallen 1%. With the increased pace of depreciation, gilt dealers fear that the RBI would choose to keep liquidity conditions tight to protect a further fall in the rupee.

"The RBI will have to prioritise protecting the rupee in order to keep inflation from rising again. That is more of a concern right now before they go on to cut rates," a dealer at a state-owned bank said. "We saw that even with the (India December) CPI inflation coming on par today (Monday), everyone was still focussed on the action on US yields and the rupee, and if at all any buys from RBI is coming through on-screen (open market operations), but that too is limited now." 

Data released Friday showed the RBI did not buy or sell gilts in the secondary market in the week to Jan. 3, a week after a minuscule INR 200 million of buys. A rise in crude oil prices also pushed up gilt yields during the day, dealers said. Brent crude oil for March delivery rose to $81.18 a barrel as of 1700 IST, crossing the psychological $80 a barrel mark. Traders said the current level of crude prices will not have a significant impact on inflation, particularly if domestic fuel prices do not rise.

Amidst apprehensions of a surge in crude oil prices following the fresh sanctions imposed by the US on Russia Friday, Informist Monday reported quoting senior government officials that India is well-positioned to handle the situation and the sanctions may only push up oil prices marginally.

Meanwhile, headline CPI inflation in December, the last reading before the MPC's next meeting, failed to lend cues to the market. India's headline retail inflation rate was 5.22% in December, slightly lower than the 5.3% estimated by an Informist poll of 15 economists. CPI inflation stood at 5.48% in November and 5.69% in December 2023. While the combined index fell 0.6% on month helped by easing food prices, the fuel and light index rose 0.6% on month in December.

Trading volume for the day was INR 597.25 billion, up from INR 351.35 billion Friday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There was one trade worth INR 50 million using the wholesale digital rupee pilot, after 11 straight days of no trades.

OUTLOOK 

On Tuesday, bond prices may take cues from the movement in US yields before US president-elect Donald Trump assumes office on Jan. 20, dealers said. Any geopolitical cues or a further rise in crude oil prices will also impact gilt prices.

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 Monday. 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, while some traders still expect the RBI to conduct open-market purchases of gilts, dealers said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.80-6.88% during the day.

India Gilts: Remain sharply down; little changed after CPI in line with view

MUMBAI--1635 IST--Prices of government bonds remained sharply down but largely unchanged from earlier in the day after India's CPI inflation for December was as per expectations, dealers said. Prices had fallen earlier in the day due to the rise in US Treasury yields and a sharp fall in the rupee to a record closing low against the dollar. 

India's headline retail inflation rate was at 5.22% in December, slightly lower than the 5.30% estimated by an Informist poll of 15 economists. CPI inflation stood at 5.48% in November and 5.69% in December 2023. Traders had earlier said the market may not have a sharp reaction to the CPI print as the exchange rate and growth may be bigger movers on monetary policy in the near term.

"The CPI print was mostly on a par with expectations, but I think the major sentiment is the uncertainty around the rupee and (US President Donald) Trump's policies that will unfold in the upcoming weeks, so people are still on caution," a dealer at a state-owned bank said. "Also, even with the lower print, rate cut in February (in India) seems less likely as the RBI (Reserve Bank of India) will first want to stabilise the rupee before focusing on growth." India's GDP growth is expected to slow to 6.4% in the financial year 2024-25 (Apr-Mar), according to the government first advance estimate.

The December inflation number is the last data available to the RBI's Monetary Policy Committee before it announces its policy rate decision on Feb. 7, which will be the first meeting for Governor Sanjay Malhotra. Traders placed short bets on the 10-year benchmark 6.79%, 2034 gilt ahead of the data in anticipation of a largely expected print due to already dwindling rate-cut expectations following the sharp depreciation of the rupee. Foreign portfolio investors' sales also weighed on gilts. According to Clearing Corp. of India data at 1630 IST, FPIs had sold INR 4.26 billion worth of fully accessible route bonds.

The market turnover was INR 548.80 billion, up from INR 304.55 billion at 1630 IST on Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.74-6.85%.  (Srijita Bose)

India Gilts: Fall more as US yields up; rate cut hopes fade as rupee tumbles

MUMBAI--1433 IST--Prices of government bonds fell further as US Treasury yields rose more in European trade. Rate cut hopes from the Reserve Bank of India's Monetary Policy Committee in February faded after the rupee fell 0.6% to a record low of 86.5850 a dollar, dealers said.

Foreign banks and investors likely sold gilts due to rise in the yield of 10-year US Treasury note to an over 14-month-high of 4.79%, pulling down the interest rate differential between the two 10-year benchmarks to a little over 200 basis points, the lowest in two decades. The yield on the 10-year benchmark gilt rose nearly 8 basis points on Monday, jumping the most intraday since Jun. 4, after the result of the Lok Sabha elections showed a much smaller majority for the National Democratic Alliance than anticipated.

State-owned banks were likely buyers as the yield on the 6.79%, 2034 bond neared 6.85%, its highest since Nov. 22. Dealers also looked ahead to India's CPI data scheduled at 1600 IST, which is expected to show a fall in headline inflation to 5.3% in December from 5.48% in November, according to an Informist poll.

"The market is bearish and there are so many uncertainties from Trump to liquidity and so on, so everyone is cautious," a dealer at a private bank said. "Plus, the data (India CPI) is also coming. Only if the print is below 5.0% can we see the yield (on the 10-year benchmark gilt) go below 6.80%."

The market turnover was INR 443.80 billion, up from INR 217.90 billion at 1430 IST on Friday, 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 6.74-6.85%.  (Srijita Bose)

India Gilts: Slump on rise in US yields, crude oil; fall in rupee drags

MUMBAI--1011 IST--Prices of government bonds slumped, tracking a rise in the 10-year US Treasury note to a 14-month-high of 4.77%. A rise in crude oil prices and a fall in the rupee to a record low also dragged down bond prices, dealers said. 

"Crude is up and UST is almost 5%, and if you see the rupee, it's at 86 (per dollar)," a dealer at a private bank said. "Some traders were also expecting an OMO (open market purchase of gilts by Reserve Bank of India) announcement but RBI announced a buyback instead." A week after buying INR 200 million worth of bonds through screen-based open market operations, data on Friday showed the RBI did not buy or sell gilts in the week ended Jan. 3.

The yield on the 10-year US Treasury note rose 7 basis points from Friday to 4.77%, the highest since Oct. 31, 2023. US yields rose as non-farm payrolls for December printed sharply higher than consensus estimates. The upcoming inauguration of Donald Trump as the next US president on Jan. 20 also pushed up US yields, as Trump's economic policies are seen inflationary, and may increase government borrowing. Domestic traders fear a rise in the 10-year US Treasury yield to 5%, which could lead to further gilt sales from foreign portfolio investors. 

Brent crude for March delivery rose to $81.04 a barrel as of 0930 IST, crossing the psychological $80 mark, pulling bond prices down, dealers said. The fall in the rupee to a record low of 86.3675 per dollar also caused a fall in bond prices, dealers said. A strengthening dollar index pulled the rupee to its lifetime low, and the fast-depreciating currency would reduce foreign investors' dollar-denominated returns, dealers said.

The market turnover was INR 164.35 billion, against INR 62.05 billion at 1030 IST on Friday, 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 6.74-6.85%.  (Cassandra Carvalho)

India Gilts: Seen mixed; 10-year bond may fall on rise in US yields, crude

MUMBAI – Prices of government bonds are seen opening on a mixed note. After strong US jobs data, the rise in US Treasury yields will pull down the price of the 10-year gilt, but the buyback notice of INR 300 billion for Thursday may limit losses in short-term bonds, dealers said. After volatility in early trade, volumes may be muted until the release of India's CPI data for December at 1600 IST. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.74-6.82% compared to 6.77% on Friday.

The yield on the 10-year US Treasury note rose to 4.77% from 4.70% at the close of the Indian market on Friday. 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 US employment report for December, released post market hours on Friday, showed non-farm payrolls grew by 256,000, against the consensus estimate of 155,000. The data pointed to resilience in the US economy, pushing up US yields as rate cut expectations in the US faded to around 30 basis points in 2025. Gilt prices may also track movement in the rupee, after consistent weakness in the Indian unit has spurred sales from foreign portfolio investors in the new year, dealers said. 

A rise in crude oil prices over the weekend may weigh on bond prices. Fresh US sanctions on Russian oil saw Brent crude oil futures for March rise around 2% from Friday to $81.04 a barrel at 0830 IST.

Short-term bonds may be insulated from negative global cues due to positivity on the domestic front, dealers said. On Saturday, the Reserve Bank of India announced the government would buy back five gilts maturing in 2025-26 (Apr-Mar) worth INR 300 billion. Most traders expected a buyback auction this week, after strong participation at the INR-250-billion buyback on Thursday. The amount announced for this week was higher than expected, and the government's action would bring down repayments in FY26, also reducing the gross borrowing figure to be announced in the Union Budget, dealers said.

Some traders may avoid large bets until India's CPI data for December is released. Traders see the inflation print at 5.3-5.5%, while an Informist poll of 15 economists estimated it at 5.3%, a four-month low. However, dealers said they were likely to focus more on non-farm payrolls data than the domestic CPI print.  (Cassandra Carvalho)

End

US$1 = INR 86.5750

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

Edited by Ashish Shirke

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