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Informist, Thursday, Jan. 16, 2025

By Vidhushi RajPurohit

MUMBAI – Government bond prices ended sharply higher on hope of the Reserve Bank of India buying gilts from the market after Bloomberg reported that the central bank may come up with measures to inject durable liquidity into the banking system, dealers said. Prices remained up earlier in the day as US Treasury yields eased overnight after the core CPI cooled below estimates, bringing foreign banks and investors back to the Indian market.

The 10-year benchmark 6.79%, 2034 bond closed at INR 100.28, or 6.75% yield, compared with INR 99.82, or 6.81% yield, at the close on Wednesday. The benchmark gilts yield logged the biggest single day fall since Feb. 1, when the Union Budget had announced a sharply lower-than-expected borrowing target.

"There were many cues in the market and all of them combined to keep the market up throughout the day," a dealer at a private bank said. "It was a positive day as there was both buying on short-covering from domestic segments and also from foreign banks as US yields eased."

Towards the market close, Bloomberg reported that the RBI may "add lasting liquidity" through tools such as foreign exchange swaps, purchase of gilts through open market operations or a further cut in the cash reserve ratio. Traders picked up gilts after the report on hopes the buys were imminent, having anticipated such a measure since mid-December when systemic liquidity slipped into deficit. Durable liquidity was at its lowest surplus since April 2023.

The central bank's continuous measures aiming to improve the liquidity conditions are also likely ways for it to pave the way for its Monetary Policy Committee to ease policy rates, dealers said. On Wednesday, the RBI also announced daily overnight variable rate repo auctions effective from Thursday to manage the banking system's liquidity, until further notice. The proactive measures raised hope the MPC, which includes three RBI members and two other voters who were in favour of rate cuts in December, would bring down the policy repo rate of 6.50% by 25 basis points.

The yield on the 10-year US Treasury note slid to 4.66% at 1700 IST from 4.78% at the close of Indian market hours on Wednesday. US yields cooled down after US core CPI inflation for December eased to 0.2% on month, against the consensus estimate of a 0.3% rise. Cooling inflation increased chances of a quicker and deeper rate cut cycle by the US Federal Open Market Committee in 2025, dealers said. Bets on more than one rate cut by the FOMC this year resurfaced post the data. 

Dealers said the RBI's decision to hold repo operations on a daily basis would likely cause a "bullish steepening" in the gilt yield curve, expecting short-term bond yields to fall more than those of long-term bonds. The 7.04%, 2029 paper was the third-most traded paper on the RBI's Negotiated Dealing System – Order Matching platform, as foreign banks and foreign portfolio investors also likely picked up short-tenure papers as US yields moderated overnight. The spreads between short- and long-term bonds steepened in early trade, before the hopes of OMOs drove up bond prices across the curve, dealers said.

Meanwhile, the surge in secondary market prices led traders to offer bonds to the government at a higher price than levels published by Financial Benchmarks India Ltd. at the buyback auction on Thursday. The government accepted offers worth only INR 98.92 billion, against the notified amount of INR 300 billion. Traders offered gilts amounting to INR 360.52 billion. Cut-off prices for all the five bonds being auctioned--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--were above Wednesday's level indicated by the Financial Benchmarks India Pvt. Ltd. 

"The sharp increase in prices led traders to bid higher prices and that led to such low acceptance by the government," a dealer at a state-owned bank said. "But, there might be more such announcements, and they need to offer to buy back different tenure bonds this time."

As the positives piled up, bond prices continued to race higher. While foreign banks were on the buying side, state-owned banks likely sold gilts heavily in the secondary market, booking profit after picking up gilts at much lower prices over the past week. The 10-year gilt yield has hit a high of 6.87% this week, and traders dumped the benchmark bond when its yield slumped to 6.75%--nearly a rupee's gain over two days.

Some short sellers, particularly private banks and primary dealerships, hit stop-losses after the 10-year bond yield fell to around 6.77% in the middle of the day. They re-entered the market to place fresh short bets ahead of the weekly gilt auction on Friday. The government will sell INR 140 billion of 6.75%, 2029 bond, INR 120 billion of 6.92%, 2039 bond and INR 100 billion of 7.09%, 2054 bond at auction 1030-1130 IST.

Trading volume for the day was INR 866.50 billion, against INR 383.25 billion on Wednesday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There was no trade using the wholesale digital rupee pilot, against two trades worth INR 100 million on Wednesday.

OUTLOOK 

On Friday, bond prices may open steady on caution ahead of the gilts auction at 1030-1130 IST. Prices will also take cues from US yields post the release of US data on retail sales and weekly unemployment claims. Any geopolitical cues or a further rise in crude oil prices will also impact gilt prices.

Gilts prices will also await any announcement by the RBI in regard to measures to infuse durable liquidity into the banking system, dealers said. Prices of gilts will also be sensitive to the movement in the Indian rupee against the dollar, as the Indian unit remained near record lows despite the dollar index falling.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.71-6.79% during the day.

Informist, Thursday, Jan. 16, 2025

India Gilts: Hit fresh high on report RBI may infuse durable liquidity

NEW DELHI--1630 IST--Government bond prices shot up to a fresh daily high after a Bloomberg report said the Reserve Bank of India is looking to take further measures to infuse liquidity into the banking system, including on a durable basis, dealers said. Traders are optimistic the measures will be announced promptly.

The report Thursday said the central bank may conduct open market gilt buys, long-term dollar-rupee buy/sell swaps, or a cash reserve ratio cut as part of its durable liquidity infusion. After the RBI on Wednesday announced it would conduct daily overnight variable repo rate operations, traders were of the view that the central bank's approach to liquidity management had changed. This comes days after RBI Governor Michael Patra retired as the in-charge of the Financial Markets Operations Department, with Deputy Governor T. Rabi Sankar getting the department.

"The market is up because it expects open market operations (buys) after the report," a senior official at a primary dealership said. "I think a cash reserve ratio cut would be the better way to do; I don't think OMOs are needed yet."

After shooting up, gilts gave up some gains as traders sold at a profit after the 10-year benchmark bond fell to the psychologically crucial 6.75% yield, dealers said. With positives piling up through the day, trade volumes also surged.

The market turnover was INR 794.65 billion, against INR 307.85 billion at 1630 IST Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. In the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.74-6.79%. (Aaryan Khanna)

India Gilts: Up more on foreign bank buys, VRRs rekindle rate cut hope

MUMBAI--1417 IST--Prices of government bonds rose further on likely purchases by foreign banks, after a fall in US Treasury yields, dealers said. The Reserve Bank of India's decision to hold variable rate repo auctions on a daily basis to address liquidity concerns also brought back expectations of a rate cut by the Monetary Policy Committee next month.

The yield on the 10-year US Treasury note fell from its near-14-month high after US core CPI cooled below estimates, bringing foreign banks and investors back to the domestic market, dealers said. A fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to foreign investors.

"There is still a big event (US President-elect Donald Trump's inauguration) next week, so everyone is waiting for the event to be over before they can go aggressive with their bets, but still, there is a lot of positivity right now with RBI (Reserve Bank of India) being proactive with the VRRs, the rupee finally showing signs of stabilising, and US yields coming down," a dealer at a private bank said. 

Private banks and primary dealers covered short bets placed Wednesday ahead of US CPI data, dealers said. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1417 IST showed trades amounting to INR 105.95 billion on the 6.79%, 2034 gilt.

Traders also picked up gilts maturing within five years, seeing these as a good bargain in view of easing liquidity conditions and a fall in overnight borrowing rates, dealers said. Some traders also built up their bets on a 50 basis points cut in the policy rate by the Monetary Policy Committee during the year on hopes that the RBI will support the falling rupee and manage liquidity concerns through daily variable rate repo auctions, they said. 

At the buyback auction, state-owned banks looked to clear their inventory of gilts maturing within a year, dealers said. Cut-off prices for all the five bonds being auctioned--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--were seen at nearly 4–5 paise above Wednesday's level indicated by the Financial Benchmarks India Pvt. Ltd. Some traders refrained from bidding at the auction as they see prices of shorter-tenure bonds jumping in the coming weeks as rate-cut expectations are firmed up, dealers said. 

The market turnover was INR 512.65 billion, against INR 250.40 billion at 1430 IST Wednesday, 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 6.75-6.83%.  (Srijita Bose)

India Gilts: Surge on RBI's daily VRRs, plunge in US yields after soft core CPI

MUMBAI--1003 IST--Prices of government bonds surged as the yield on the 10-year US Treasury note plunged to 4.66% from 4.78% at the close of Indian market hours on Wednesday, after core CPI inflation in the US printed softer than consensus estimates. The Reserve Bank of India's decision to hold variable rate repo auctions on a daily basis also aided the rise in gilt prices, dealers said. 

The 10-year US yield fell from its near-14-month high after core CPI cooled below estimates, bringing back expectations of the Federal Open Market Committee easing rates by at least 50 basis points this year, as projected in December. Before the data print, traders bet on only one cut of 25 bps by the FOMC in 2025, dealers said.

In addition to the offshore trigger, traders said short-term gilt prices would be boosted by the Reserve Bank of India's decision to conduct daily variable rate repo auctions. These are expected to keep overnight rates near the policy repo rate of 6.50%. With consistent liquidity support now in place, traders bet on a repo rate cut by the RBI's Monetary Policy Committee in February, dealers said. Rate cut bets had faded on Monday as US yields surged and the rupee slumped against the dollar.  

"They're bringing back durable liquidity, so there's more and more Feb rate cut buying, if you see the price action," a dealer at a state-owned bank said. "However, we have to see the trajectory of the rupee, for this rise to sustain (in the coming days)."

Traders await the bond buyback auction from 1030-1130 IST. The government will buy back INR 300 billion worth of five gilts maturing in 2025-26 (Apr-Mar). Bond prices are expected to remain sharply up during the day despite further US economic data after market hours. The five-year swap rate fell 7 bps to 6.22% from Wednesday's close. However, any further depreciation of the local currency against the dollar might weigh on bond prices. Strong profit-booking by traders, as yields fell 3-4 bps from Wednesday, kept gains limited, dealers said.

The market turnover was INR 161.30 billion, against INR 41.25 billion at 0930 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 6.77-6.88%.  (Cassandra Carvalho)

India Gilts: Seen up on fall in US yields, RBI's announcement of daily VRRs

MUMBAI – Government bond prices are seen opening higher, tracking a fall in US Treasury yields after core CPI inflation in the US for December was below consensus estimates. The Reserve Bank of India's announcement late on Wednesday of holding variable rate repo auctions on a daily basis may also support bond prices, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.77-6.88% compared to 6.81% on Wednesday. The yield on the 10-year US Treasury note plunged to 4.66% at 0800 IST from 4.78% at the close of Indian market hours on Wednesday. US yields cooled after US core CPI inflation for December eased to 0.2% on month, against the consensus estimate of 0.3%. Cooling inflation increased chances of a quicker and deeper rate cut cycle by the US Federal Open Market Committee in 2025, dealers said. Bets on more than one rate cut by the FOMC this year resurfaced post the data. 

On the domestic front, the Reserve Bank of India is set to hold daily variable rate repo auctions until further notice, to ease tightening liquidity conditions in the banking system. The announcement will give a boost to bond prices as gilt traders were long awaiting such measures from the RBI, to infuse durable liquidity into the system. The systemic liquidity deficit stood at INR 2.50 trillion on Monday and INR 2.09 trillion on Tuesday.

The first auction after the announcement will be held for INR 500 billion at 1000-1030 IST Thursday. The RBI also allowed primary dealerships to take part in these auctions, which may lead to increased trading activity in the gilts market. The measure is also seen as a positive on the rate-cut front, with hope of a rate cut by the RBI's Monetary Policy Committee in February increasing after the announcement, as easing liquidity is seen as the beginning of softening monetary policy. However, the announcement could be a slight disappointment for some as traders were expecting the RBI to announce the purchase of gilts through open market operations to infuse liquidity.  (Cassandra Carvalho)

End

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

Edited by Akul Nishant Akhoury

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