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Informist, Monday, Jan. 27, 2025

By Vidhushi RajPurohit

MUMBAI – Government bond prices ended higher on Monday after the weekly statistical supplement on Friday proved traders' long-awaited expectations on open market purchases of gilts by the Reserve Bank of India correct, dealers said. Expectations of a lower net borrowing in the Budget for 2025-26 (Apr-Mar), a 25-basis-point cut in the policy repo rate at the Monetary Policy Committee meeting and easing of US Treasury yields also aided prices.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.76, or 6.68% yield, against INR 100.48, or 6.72% yield, on Friday. Intraday, the 10-year gilt yield fell below 6.65% and hit its lowest level since Feb. 15, 2022, before profit-booking capped gains.

The RBI data after market hours on Friday showed that the central bank bought INR 101.75 billion worth of gilts through screen-based open market operations in the week ended Jan. 17. During the day, traders picked up gilts aggressively on expectation that the central bank will to continue with its open market purchase of bonds as the durable liquidity in the banking system requires significant infusion, dealers said. The durable liquidity in the banking system as of Jan. 10 was at INR 401.02 billion, the lowest level since at least 2020, RBI data showed.

Mutual funds and foreign banks were the likely buyers. Meanwhile, shedding of bonds by state-owned banks kept the gains capped, dealers said. The easing of the 10-year benchmark US note to 4.51% from 4.63% at 1700 IST Friday also led to some inflows from foreign portfolio investors, dealers said. 

"Heading into a policy easing cycle, there was a strong need for the RBI to do something for liquidity. Now that the market saw the OMO figure and the last few days' high buying by the 'others' segment, everyone is seeing the data as a starting point for future OMO buys," a dealer at a primary dealership said. For the week ended Jan. 17, 'others', a segment that comprises insurance companies, provident funds and the central bank, bought gilts worth INR 199.66 billion in the secondary market. In the week to Friday, the segment net bought INR 186.97 billion in the secondary market.

Yields of bonds across tenures fell as traders started positioning for the upcoming Budget on Saturday and reaffirmed their bets for a 25 bps cut in the repo rate next week, dealers said. However, the fall in the 10-year benchmark, the 2034 bond, was more pronounced as traders speculated that the RBI might have concentrated its screen-based buying on that bond. 

"We cannot gauge the papers which RBI is buying, but the price movement could reflect that it might have purchased the 2034 bond, and it is also the most traded paper in the secondary market," a dealer at a private bank said. "If it (RBI) releases a calendar and conduct OMO auctions, then only more papers will register significant price movements."

Dealers expect the yield on the 6.79%, 2034 gilt to touch 6.62% before the Budget on Saturday, which would the lowest in almost three years. According to an Informist poll, the government's gross market borrowing is seen rising on year in FY26, while net borrowing may fall to INR 11.20 trillion from INR 11.63 trillion for the current financial year. 

With the RBI taking proactive measures on liquidity, traders are more confident that the central bank is setting the stage for a repo rate cut by its rate-setting panel on Feb. 7. Informist reported earlier Monday that economists asked the central bank to lower the repo rate in February to support growth, which is estimated to fall to a four-year low of 6.4% in FY25. While most economists were in favour of a repo rate cut from the current 6.50%, they said that the central bank must ease the current liquidity strain in order to make the transmission of any rate cut effective. Traders said they were now almost certain the repo rate of 6.50% would be cut by 25 bps next week. 

The market expects yields on long-term bonds to fall more than the 10-year, but short-tenure bonds may outperform the benchmark in the near term with the liquidity conditions set to ease after the central bank's measures, dealers said. The long-term papers are also likely to see a good appetite from the insurers and pension funds in the traditionally strong Jan-Mar quarter. Moreover, the impact of the government's fiscal consolidation will be more pronounced for long bonds as they constituted over 35% of the government's issuance over the past two years, dealers said.

Traders are largely discounting the upcoming US Federal Open Market Committee's meeting this week, due Wednesday, as a non-event, dealers said. At 1700 IST, the CME FedWatch tool showed that Fed fund futures have almost fully priced in a status quo in rates at this meeting. 

Trade volume rose to INR 742.90 billion on Monday from INR 468.65 billion on Friday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trade using the wholesale digital rupee pilot on Monday.

OUTLOOK

On Tuesday, bond prices may open higher after the RBI announced, after market hours, several measures to infuse durable liquidity into the financial system. Traders said this is likely a precursor to a repo rate cut in February's monetary policy review, and the 10-year gilt yield may fall to multi-year lows.

"The announcement of OMO auction signals that the RBI is targeting durable liquidity, which is cementing the hopes of a repo rate in February," a dealer at another primary dealership said. "Now, the eyes will be on the Budget, which the market is construing as a positive for now."

The RBI on Monday said it will buy government bonds worth INR 600 billion via open market operation auctions in three tranches. The first auction of INR 200 billion will be held on Thursday, in which, the RBI will buy five bonds, including the 10-year benchmark 6.79%, 2034 bond, erstwhile 10-year gilts the 7.18%, 2033 bond and the 7.10%, 2034 bond, the 7.59%, 2029 bond and the former 14-year benchmark 7.18%, 2037 bond.

The central bank also announced a INR-500-billion 56-day variable rate repo auction on Feb. 7, the day of its next MPC outcome. In addition, it will conduct a dollar/rupee buy/sell swap auction – the first since April 2019 – of $5 billion for a tenor of six months on Friday.

Bonds may 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 6.60-6.70% during the day.

India Gilts: Remain sharply up; fall in US yields add to domestic positives

MUMBAI--1610 IST--Government bond prices remained sharply higher as traders expected the Reserve Bank of India to continue purchasing gilts through open market operations. A fall in US Treasury yields also aided prices, dealers said.

The yield on the benchmark 10-year US Treasury note eased to 4.54% at 1450 IST from 4.63% at 1700 IST Friday. Foreign banks and investors likely bought gilts as 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. Private banks and mutual funds were also likely buying gilts, while state-owned banks were likely on the selling side, dealers said.

Dealers said the INR 101.75 billion worth of gilt purchases by the RBI in the week ended Jan. 17 showed that the central bank is keen to take proactive measures to infuse liquidity. They expect further liquidity infusion measures to be announced at the upcoming RBI Monetary Policy Committee meeting in February, as well as a potential repo rate cut from the six-member panel. Two external members have already voted for rate cuts in December, and the new RBI members on the committee are seen in favour of rate cuts, dealers said.

"Even though people are pricing in more than 80% of a rate cut in February right now, short-term bond yields are not seen falling much from here, partly because liquidity is still tight, plus these papers have already moved so much in the past few weeks," a dealer at a private bank said. "People are expecting more of OMO and something on liquidity at MPC now, but till then liquid papers and some long-term papers look good." 

The panel will be headed by RBI Governor Sanjay Malhotra. Deputy Governor Rajeshwar Rao, who is also slated to attend the next meeting, recently took charge of the RBI's Monetary Policy Department after the retirement of Michael Patra on Jan. 14. It will be the first monetary policy meeting for the two officials.

RBI Governor Sanjay Malhotra and Deputy Governor Rajeshwar Rao slated to attend the next meeting, taking charge of the RBI's Monetary Policy Department after the retirement of Michael Patra on Jan 14. It will the first MPC meeting for the two officials.

Traders also held on to their expectation of a cut in gross borrowing in 2025-26 (Apr-Mar) from the current INR 14.01 trillion. With longer-tenure bonds taking up over 35% of the government's issuance over the past two years, the spread of longer-tenure bonds over the 10-year benchmark gilt may shrink going into the Budget on Saturday.
 

The market turnover stood at INR 640.50 billion, higher than INR 411.40 billion at 1630 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the session, the yield on the 6.79%, 2034 bond is seen at 6.65-6.72%.  (Srijita Bose)

India Gilts: Remain sharply up; traders expect more RBI OMO gilt purchases

MUMBAI--1310 IST--Prices of government bonds remained sharply up as traders expected more open market gilt purchases by the Reserve Bank of India after the weekly statistical supplement on Friday showed that the central bank net bought gilts worth INR 101.75 billion through screen-based buys in the week ended Jan. 17, dealers said. Traders said further durable liquidity infusion measures could also be announced at the RBI's Monetary Policy Committee meeting next week.

On Sunday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions—was at INR 3.13 trillion. Meanwhile, according to RBI data, the durable liquidity in the banking system as of Jan. 10 was at INR 401.02 billion, the lowest level since at least 2020. The RBI's continued intervention in the foreign exchange market has strained the systemic liquidity as it sold dollars to prevent the Indian rupee from declining sharply. Traders expect the central bank to keep the systemic liquidity conditions as a focal point in the next Monetary Policy Committee meeting and would likely work to improve the durable liquidity before going for a policy repo rate cut, dealers said.

"We only have three days of data that showed the OMO purchase, and it started since it launched the daily VRR (variable rate repo) operations, so we can expect more staggered purchases from the central banks, at least for INR 1 trillion to make any significant improvement to the liquidity," a dealer at a private bank said. 

The ease in US Treasury yields was also a positive cue for gilt traders, dealers said. The yield on the benchmark 10-year US Treasury note was at 4.59% at 1130 IST, down from 4.63% at 1700 IST Friday. Gilt prices were also up as traders expect gross borrowing in the upcoming Union Budget for 2025-26 (Apr-Mar) to be lower than INR 14.01 trillion in the current financial year, dealers said. In an Informist poll of 16 analysts and fund heads, gross borrowing is seen rising on year while net borrowing may fall 3.7% to INR 11.20 trillion.

However, the price of the 6.79%, 2034 gilt remained capped at around INR 100.77 due to some likely profit booking by state-owned banks and private banks, dealers said. These banks likely found the current level lucrative to sell as they bought earlier when the yield on the 10-year benchmark gilt was around 6.80%, dealers said.

Foreign banks and some mutual funds are likely buyers, and traders expect the volumes to remain up on positive trading cues. The market turnover stood at INR 443.95 billion, higher than INR 249.00 billion at 1330 IST 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 6.65-6.72%. (Vidhushi RajPurohit)

India Gilts: Surge after RBI's long-awaited OMO gilt buys in week to Jan 17

MUMBAI--1018 IST--Prices of government bonds surged after Reserve Bank of India data after market hours Friday showed that the central bank bought INR 101.75 billion worth of gilts through screen-based open market operations in the week ended Jan. 17. The long-awaited move amid tight liquidity over the past month pushed down the 10-year gilt yield to its lowest level since Feb. 15, 2022. 

The RBI's INR 101.75-billion purchase is the largest gross weekly bond purchase since it ended its government securities acquisition programme in September 2021. It is also the largest net purchase since August of that year, and the most government securities bought outside auctions in a week since Apr. 30, 2021. Traders will now see whether the RBI will continue to maintain its purchases in this quantum or whether it will lessen the number, dealers said, but the persistent sentiment is that further on-screen purchases of tens of billions of rupees are coming.

"Now the RBI will continue to buy gilts on-screen, that's the sentiment in the market right now," a dealer at a state-owned bank said. "Market is already reacting to what happened (the data release on Friday), but it's good to sell at these levels so it (the yield on the 10-year benchmark gilt) won't stay here (at 6.67%)."

However, the on-screen operations have driven down the likelihood of the RBI buying bonds at an auction, dealers said. Some traders also felt that bond prices had overreacted to the data. Gains were capped as state-owned banks, along with some private banks, sold bonds at a profit as the yield on the 6.79%, 2034 bond hit 6.68%, which was seen as a key technical level. Until the Union Budget for 2025-26 (Apr-Mar) on Saturday, traders expect the 10-year gilt yield to not fall below 6.65%, near its lowest in FY25. 

Volumes also surged, and the market turnover stood at INR 210.65 billion, higher than INR 150.05 billion at 1030 IST 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 6.65-6.72%. (Cassandra Carvalho)

India Gilts: Seen up on large RBI OMO buys in week ended Jan 17

Prices of government bonds are seen opening higher after the Reserve Bank of India's weekly statistical supplement on Friday showed that the central bank net bought INR 101.75 billion worth of gilts through screen-based open market purchases in the week ended Jan. 17. A fall in US Treasury yields may also aid bond prices, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.68-6.73%, compared to 6.72% on Friday.

The RBI's INR 101.75-billion purchase is the largest gross weekly bond purchase since it ended its government securities acquisition programme in September 2021. It is also the largest net purchase since August of that year, and the most government securities bought outside auctions in a week since Apr. 30, 2021.

For the week ended Jan. 17, 'Others', a segment that comprises insurance companies, provident funds and the central bank, bought gilts worth INR 199.66 billion in the secondary market. On Friday, bond prices ended higher 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. 

Bond market traders have been keenly tracking Clearing Corp. of India Ltd. data for clues on the RBI's buys in the secondary market, as the liquidity deficit in the banking system has been widening due to the RBI's intervention in the foreign exchange market. The RBI's net liquidity injected in the banking system rose to a one-year high of INR 3.16 trillion on Thursday.  

The positive cue from the RBI is likely to boost traders' expectations of the Monetary Policy Committee cutting rates at its meeting next week, dealers said. Bond traders are pricing in at least a 25-basis-point cut in the repo rate. Traders also hope for an announcement of the RBI's open-market purchase of gilts via an auction or a further cut in the cash reserve ratio. In December, the RBI cut the ratio by 50 bps to 4% of banks' net demand and time liabilities. 

Before the MPC meeting, traders are eyeing the Union Budget for 2025-26 (Apr-Mar). Traders may continue to place bets on expectations of gross market borrowing in FY26 falling below the INR 14.01 trillion budgeted for the current financial year. Lower supply with the natural increase in the market's appetite for bonds on year is likely to skew demand-supply dynamics, and sharply bring down gilt yields after the Budget, they said. 

On the global front, a fall in US yields over the weekend may aid a rise in gilt prices. The yield on the benchmark 10-year US Treasury note fell to 4.59% at 0800 IST, from 4.63% at 1700 IST Friday. Dealers await the outcome of the US Federal Open Market Committee's meeting this week, due early Wednesday. At 0800 IST, the CME FedWatch tool showed that Fed fund futures have almost fully priced in a status quo in rates at this meeting. (Cassandra Carvalho)

End

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

Edited by Saji George Titus

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