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Informist, Friday, Jan. 24, 2025

By Vidhushi RajPurohit

MUMBAI – Government bond prices ended higher Friday on speculation that the Reserve Bank of India bought gilts in the secondary market Thursday to infuse durable liquidity into the banking system, dealers said. Gilt prices also rose after US President Donald Trump's comments on policy rate cuts by the US Federal Reserve stoked traders' expectations of a repo rate cut in February by the RBI's Monetary Policy Committee.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.48, or 6.72% yield, against INR 100.38, or 6.73% yield, on Thursday. During the day, the yield on the 2034 bond fell below 6.71% for the first time since Dec. 11.

Speculation about the RBI's purchases began after market hours Thursday, with the Clearing Corp. of India showing gilts worth INR 72.22 billion bought in the 'Others' segment. The net liquidity injected by the RBI in the banking system rose to a one-year high of INR 3.16 trillion on Thursday. Traders have been expecting the RBI to inject durable liquidity into the banking system for the past month through open market gilt purchases or a second cash reserve ratio cut.

After picking up INR 220 billion worth of the bond at the gilt auction Friday, traders sold some of their holdings following the auction result. The 2034 gilt was picked up by banks and primary dealers as they had earlier placed short bets on the paper, dealers said. Both end-investors and traders got the paper at the auction-–the RBI accepted 171 competitive bids for the 2034 bond at the debt sale.

"The market had both the incentive to buy and to sell, as the yields would fall in the coming days as there is expectation that the Budget would show a lower borrowing figure and then the levels were really good for those who entered at 6.87% (yield on the 10-year gilt) level," a dealer at a state-owned bank said. "The auction also received good bids from participants, so some traders sold their existing holdings in the secondary market."

Trade volumes in longer tenure paper also increased during the day on insurers' demand for Separate Trading of Registered Interest and Principal of Securities, dealers said. Demand for derivatives also boosted demand for the 7.09%, 2074 bond at the auction. However, with insurers likely being heavy buyers in the secondary market through the week, the cut-off on the 50-year bond fell slightly short of expectations. Despite traders expecting the gilt yield curve to steepen--short-term yields falling more than longer tenures--heading into a potential rate-cutting cycle, the yield on the 40-year benchmark 7.34%, 2064 gilt has already fallen over 7 basis points this week, reducing its spread over the 10-year gilt by nearly 3 bps.

Since last Thursday, the central bank has been conducting daily variable rate repo auctions, but that has only helped bring down the interbank borrowing rates, anchoring them around the repo rate. The weekly statistical supplement extract released after market hours Friday also showed that the central bank purchased gilts amounting to INR 101.75 billion in the week ended Jan. 17. The last time the central bank bought gilts was in the week ended Dec. 27, but the amount then was only INR 200 million.

The speculation of open market buys only added momentum to the prevailing optimism on gilt prices heading into the Union Budget for the financial year 2025-26 (Apr-Mar) and the rate-setting panel's meeting. Traders expect the Centre's net borrowing to fall in FY26 compared to the INR 11.63 trillion budgeted in the current fiscal. According to an Informist poll of 18 analysts, mutual funds, and treasury heads, the government may peg its net market borrowing at INR 11.20 trillion.

Trump's comments on Thursday that he would demand an immediate cut in US interest rates led traders to strengthen their hopes of a 25-basis-point cut in India's policy repo rate in February, dealers said. Traders expect the yield on the 10-year benchmark gilt to ease to 6.55-6.60% once the central bank begins the rate-cut cycle.

"The G-sec has got good momentum now, there are still uncertainties, but the hope of a rate cut has strengthened after Trump's comments, so the market is pricing in the positives," a dealer at a state-owned bank said. "If the RBI also eases liquidity, we can expect yields on both the short- and long-term bonds to move down from here."

The rise of the Indian rupee against the dollar also led traders to hope that the RBI might begin purchasing dollars, thereby infusing durable liquidity into the banking system, dealers said. On Friday, the rupee settled at 86.2050 a dollar, its highest level in two weeks against the greenback. With the rupee also recovering from record lows, traders said the RBI may be less wary of a repo rate cut that would hurt the currency.

Trade volume fell to INR 468.65 billion on Friday, against INR 511.85 billion Thursday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. As on Thursday, there were no trades using the wholesale digital rupee pilot on Friday too.

OUTLOOK 

The gilt market is shut Saturdays. On Monday, bond prices may open higher after data showed the RBI bought INR 101.75 billion worth of gilts in the week ended Jan. 17, its largest bond purchase outside an open market auction since April 2021. Bonds will also take cues from the movement of US yields and the policy pronouncements of US President Donald Trump, dealers said.

Any geopolitical cues or a further rise in crude oil prices will also affect gilt prices. Prices of gilts will also be sensitive to the movement of the Indian rupee against the dollar. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.73% during the day.

India Gilts: Off highs; auction fulfils mkt appetite, cut-off prices miss view

MUMBAI--1617 IST--Government bond prices were off highs as traders sold gilts after picking up stock worth INR 320 billion at the weekly auction, dealers said. Though the cut-off prices were a little lower than expectations, traders held on to hopes of a fall in the government's net borrowing in 2025-26 (Apr-Mar) and of a 25-basis-point rate cut by the Reserve Bank of India's Monetary Policy Committee at its meeting in February. Prices had risen sharply earlier on speculation that the central bank had bought bonds in the secondary market on Thursday.

"There is a lot of chatter that RBI is buying on-screen, but overall the market is bullish because there are a lot of hopes pinned on Budget and MPC as well as on liquidity," a dealer at a state-owned bank said. "At the auction too, though cut-offs were a little lower, demand was good, it's just that people don't want to bid aggressively at these levels as market is in a crucial zone around 6.70-6.71% levels (yield on the 10-year benchmark 6.79%, 2034 gilt)."

The INR 220 billion of 10-year bond supply was picked up across the market, with the RBI accepting 171 bids for the gilt. After their appetite was fulfilled, traders did not buy bonds aggressively in the secondary market. Primary dealers likely sold gilts in the secondary market after buying in the auction, dealers said. Private banks and foreign banks, on the other hand, continued to buy gilts in the secondary market, they said.

Some dealers picked up the bond as they see the yield on the 10-year benchmark gilt falling close to 6.50% once the rate cut cycle begins in India. Traders also preferred shorter tenure gilts maturing within 10 years on the view that the yield spread between the 10-year benchmark gilt and the five-year on-the-run 6.75%, 2029 gilt will steepen to nearly 15 basis points if the MPC cuts rates and announces additional liquidity measures through either another cut in banks' cash reserve ratio or open market purchases of gilts, dealers said. Currently, the spread between the two bonds is over 7 bps. 

Trade volumes in longer tenure papers also increased during the day on insurers' demand for Separate Trading of Registered Interest and Principal of Securities, dealers said. Demand for derivatives also boosted demand for the 7.09%, 2074 bond at the auction. However, with insurers likely being heavy buyers in the secondary market through the week, the cut-off on the 50-year bond fell slightly short of expectations. Despite traders expecting the gilt yield curve to steepen – short-term yields falling more than longer tenures – heading into a potential rate cut, the yield on the 40-year benchmark 7.34%, 2064 gilt has already fallen over 6 bps this week, 2 bps more than the 10-year yield.

The market turnover was INR 425.75 billion, against INR 472.20 billion at 1630 IST on Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. In remainder of the session, the yield on the 6.79%, 2034 bond is seen at 6.68-6.75%.  (Srijita Bose)

India Gilts: Up on speculation of RBI buys Thu; auction seen sailing through

MUMBAI--1300 IST--Prices of government bonds remained up as traders speculated that the Reserve Bank of India had purchased gilts in the secondary market on Thursday, dealers said. The weekly auction of INR 320 billion worth of gilts is seen sailing through.

The government offered to sell INR 220 billion of the 6.79%, 2034 bond and INR 100 billion of the 7.09%, 2074 bond at 1030-1130 IST. Demand at the auction was seen firm, with banks likely picking up the 10-year benchmark gilt. While some traders were sceptical that state-owned banks would buy gilts at yields at over a one-month low, traders from those banks said they wanted to replenish their bond portfolios after selling gilts at a profit earlier this week, dealers said. According to Clearing Corp. of India data, state-owned banks have sold INR 145.98 billion worth of gilts in the secondary market this week.

Insurers and pension funds are seen picking up the longer-tenure paper without demanding higher yields due to their robust appetite, dealers said. Demand for the 2074 paper is also being propelled by banks and primary dealers. While foreign banks will pick up the bond due to bond forward-rate agreements with life insurance firms, primary dealers had client demand for the Separate Trading of Registered Interest and Principal of Securities instruments and would turn the paper into zero-coupon bonds, dealers said.

Meanwhile, Clearing Corp. of India data showed 'others' net bought a large chunk of gilts on Thursday, which stoked speculation that it was the Reserve Bank of India picking up gilts. Traders have been expecting that the RBI will conduct an open market purchase of gilts to infuse durable liquidity in the banking system, which has been in deficit since Dec. 15. The central bank bought INR 200 million worth of gilts in the week ended Dec. 27, which traders have discounted as a cue due to the miniscule amount. The net liquidity injected by the RBI--a proxy for systemic liquidity conditions--rose to INR 3.16 trillion on Thursday, the highest level since Jan. 24, 2024.

Gilt prices also rose after US President Donald Trump on Thursday said he would want the US Federal Reserve to cut rates, and the world to follow. The comments by Trump reaffirmed gilt traders' hopes of a policy repo rate cut in February by the Monetary Policy Committee, dealers said. The rate-cut expectations also strengthened as the dollar index fell following Trump's comments, helping the rupee rise against the dollar. The rupee was trading at 86.3025 a dollar, against Thursday's close of 86.4575 a dollar.

"There is a rate-cut expectation, then the speculation of the RBI buying gilts at OMO (open market operation) is also there now that the deficit is rising even after CRR cut (cash reserve requirement cut), so all these will keep the prices up, there are too many positives in the market," a dealer at a private bank said.

The market turnover was at INR 228.85 billion, against INR 240.25 billion at 1330 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 6.68-6.75%. (Vidhushi RajPurohit)

India Gilts: Sharply up after Trump rate cut call adds to other positives

MUMBAI--1028 IST--Prices of government bonds were sharply up as a call for lower interest rates by US President Donald Trump and a subsequent rise in the rupee added to other positives for gilts heading into the Union Budget on Feb. 1, dealers said. The yield on the 10-year benchmark 6.79% gilt fell below 6.71% for the first time since Dec. 11.

In a virtual speech at the World Economic Forum in Davos, Trump said he would demand an immediate cut in US interest rates, which led some gilt traders to buy bonds expecting a fall in US Treasury yields soon, though there was no major reaction in Asian trade after the speech. This eased earlier fears of the 10-year US Treasury yield jumping sharply in 2025. Analysts at Nomura and T. Rowe Price have raised the possibility of the 10-year US Treasury note touching 6% this year, with a widespread concern over at least 5% being hit. The yield on the 10-year benchmark US Treasury note was at 4.63% as of 1028 IST, from 4.62% at 1700 IST Thursday. 

"We may not see an immediate impact because nobody will believe Trump initially, but it brings back the conversation about the US government pushing through or largely leaning on the FOMC to cut rates," a dealer at a foreign bank said. "The comments are risk(-asset) positive. Anyway, onshore positioning is growing heading into the Budget, so hard to see this rally break immediately."

Some bond traders did not have the same view on Trump's remarks making an impact on either the US Federal Reserve or other central banks, stating that gilt yields would only react to the news if US yields did, pointing to other domestic factors for rise in prices at the market open, which was slightly unexpected. The appreciation of the rupee against the dollar after Trump's speech aided gilt prices, which have been trending upward as traders add to their gilt portfolio ahead of the Union Budget for 2025-26 (Apr-Mar) and the Reserve Bank of India's Monetary Policy Committee meeting in February.

Gilt traders expect the government's net borrowing in FY26 to be lower than what it had budgeted for this fiscal year, as it aims for fiscal consolidation. With the Monetary Policy Committee set to meet less than a week after the Budget, gilt traders are also pricing in a rate cut by the RBI's rate-setting panel, hope that is strengthened by the appreciating local currency, dealers said.

Demand at the INR-320-billion bond auction is seen strong, especially after the rise in bond prices at open. "We're re-calculating our bids at the auction because of the unexpected jump in prices, I think bidding will be quite aggressive," a dealer at a state-owned bank said. 

Some traders also picked up bonds on speculation of the RBI purchasing bonds on-screen via open market purchases to infuse liquidity into the banking system. These hopes were stoked after Clearing Corp. of India showed the 'Others' segment bought gilts worth INR 72.22 billion Thursday. The RBI's net liquidity injected in the banking system rose to a one-year high of INR 3.16 trillion on Thursday.

However, some dealers felt that the purchases were likely from insurers for bond forward-rate agreements, and were not by the RBI. The 'Others' segment comprises insurance companies, provident funds and the central bank.

The market turnover at INR 156.55 billion was higher than INR 77.60 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 6.68-6.75%. (Cassandra Carvalho)

India Gilts: Seen down on short bets before INR-320-bln weekly bond auction

MUMBAI – Prices of government bonds are seen opening lower as traders place short bets before the INR-320-billion weekly bond auction, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.71-6.79%, compared to 6.73% on Thursday.

The government will sell INR 220 billion of the 6.79%, 2034 bond and sell INR 100 billion of the 7.09%, 2074 bond at 1030-1130 IST. Demand at the auction is seen firm, with banks lapping up the 10-year benchmark. Insurers and pension funds are seen picking up the longer-tenure paper, dealers said.

Prices of the benchmark 10-year bond and the 7.46%, 2073 gilt ended lower than most tenures Thursday, as traders trimmed their portfolios to pick up auction stock. 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 0800 IST showed trades worth INR 127.76 billion in the 6.79%, 2034 gilt. As for the 2073 paper, traders sold the bond to get their hands on the recently-issued 7.09%, 2074 bond. The latter has an outstanding amount of only INR 300 billion. The result of the auction will lend cues to the movement of bond prices later in the day, dealers said.

US Treasury yields were little changed overnight, and bond prices are unlikely to take cues from the offshore trigger. The yield on the 10-year benchmark US Treasury note was at 4.63% as of 0800 IST, from 4.62% at 1700 IST Thursday. Jobless claims in the US for the week ended Saturday rose to 223,000, marginally higher than a Dow Jones estimate of 221,000.

As for crude oil prices, Brent crude for March delivery eased to $78.19 a barrel in Asian trade at 0800 IST from $79.29 a barrel at the end of Indian market hours on Thursday. Crude prices eased after US President Donald Trump said he would ask the Organization of the Petroleum Exporting Countries and its allies to reduce the cost of oil in a bid to increase pressure on Russia. Easing oil prices may lend a positive cue to bond prices during the day, dealers said. (Cassandra Carvalho)

End

US$1 = INR 86.21

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

Edited by Rajeev Pai

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