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Informist, Tuesday, Jan. 28, 2025

By Vidhushi RajPurohit

MUMBAI – Government bond prices ended lower on heavy profit-booking by state-owned banks and primary dealerships, as well as caution ahead of the Union Budget for 2025-26 (Apr-Mar) Saturday, dealers said. Bond prices, which opened sharply higher following the Reserve Bank of India's measures on Monday to infuse durable liquidity in the banking system, traded higher for most of the day.

The 6.79%, 2034 bond ended at INR 100.70, or 6.69% yield, against INR 100.76, or 6.68% yield, on Monday. The benchmark yield fell to a near-three-year low of 6.6254% intraday as traders bet on the increased probability of a policy repo rate cut at the Monetary Policy Committee meeting next week after the central bank's announcement on liquidity.

Gilt prices opened sharply higher as the central bank announced it would conduct open market purchases of bonds worth INR 600 billion in three tranches. The first auction of INR 200 billion on Thursday will be the first such bond purchase since September 2021. The RBI also announced a 56-day variable rate repo auction and a dollar/rupee buy/sell swap auction targeting the persisting deficit liquidity in the banking system. On Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--was INR 3.10 trillion. The durable liquidity in the banking system as of Jan. 10 was also at a deficit of INR 401.02 billion, the first deficit since July 2019.

Traders took the announcement of open market operations as a big positive for the gilts market, as it will not only infuse durable liquidity in the banking system but also skew the demand-supply dynamic, thus pushing up prices, dealers said. The improvement in liquidity conditions was also seen as a crucial factor before the central bank could proceed to ease the policy rates, which the market and economists had suggested in meetings earlier this month.

"6.68% has been a crucial level for the (6.79%, 2034) bond which it has held (at closing). The fall earlier was because of heavy buying after the OMO announcement pushed up traders' rate cut hopes," a dealer at a state-owned bank said. "But then there was offloading as it was a good level to exit and plus towards end market realised that there are big events coming up." 

However, the initial spurt of buying did not sustain as traders started selling gilts at profit, dealers said. Trading volumes were largely at the same level as Monday, with the market turnover for the day at INR 736.40 billion, against INR 738.65 billion on Monday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. Volumes started off stronger, before waning in the second half of trade as buying interest dwindled.

Traders likely hit intraday stop-losses as prices kept sliding. Active traders who had picked up gilts over the past few weeks betting on the RBI to announce durable liquidity measures also squared off their bets Tuesday at a profit, dealers said. Meanwhile, investors with longer investment horizons lapped up the 10-year gilt as prices fell. The gilt's yield is not seen rising much above 6.70% even if there is a slight disappointment about Budget announcements, due to expectations of rate cuts, dealers said. However, a small section of the market believes the RBI may have introduced liquidity measures likely to normalise liquidity conditions without needing to commit to a repo rate cut, dealers said.

Traders expect a good investor appetite for longer-tenure bonds and easing liquidity conditions to provide flows to shorter-tenure papers as well. During the day, some insurers' demand was also seen in 7.09%, 2074 bond for Separate Trading of Registered Interest and Principal of Securities, dealers said.

"In terms of tenure, long bonds are lucrative right now, but there is still juice in shorter tenure bonds and with the (RBI's) focus on liquidity, these bonds may actually achieve a steepening," a dealer at a private bank said. Despite the firm demand from insurers, the 10-year benchmark 6.79%, 2034 gilt will get a boost from the RBI's buys at the OMO auction on Thursday, leading to an outperformance against bonds maturing above 30 years, dealers said. The spread of the 40-year benchmark 7.34%, 2064 bond – usually the most liquid ultra-long-term security – over the 10-year gilt was at 33 basis points Tuesday, as against 29 bps at the beginning of the month.

OUTLOOK

On Wednesday, bond prices may open slightly higher on hopes of a repo rate cut in the monetary policy review next week, dealers said. The liquidity infusion measures announced by the RBI on Monday are seen as positive for bond prices. Some caution ahead of Saturday's Budget may keep prices from rising sharply, dealers said.

Traders may pick up bonds the RBI has offered to buy at its first bond purchase auction since September 2021. At the OMO auction on Thursday, 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.

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 and crude oil prices will also impact 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 6.62-6.72% during the day.

India Gilts: Off highs as traders take profit after early surge on RBI steps

MUMBAI--1613 IST--Prices of government bonds were off highs after jumping earlier, as profit booking took hold. State-owned banks were likely the largest sellers as the yield on the 10-year benchmark bond touched a near three-year low level at 6.6254%, dealers said.

State-owned banks were now trimming stock from their 'held-to-maturity' books to take advantage of profitable exits offered at current yield levels, particularly near the end of the financial year in March, dealers said. Banks can sell up to 5% of the holdings in this portfolio during a financial year. Some selling was also seen as traders refrained from making aggressive purchases before the upcoming Union Budget for FY26. 

"Market was already in an upward direction after Friday's data showed RBI buying gilts and then the announcement from the RBI to ease liquidity gave a needed nod, so prices just rallied," a dealer at a state-owned bank said. "But, the current levels are really profitable to sell for the public (sector) banks, and there might also be some selling by private banks at the current yield level as they bought a good quantum yesterday (Monday)."

Gilt prices surged at the open after the Reserve Bank of India announced liquidity infusion measures after market hours on Monday. Cementing their policy repo cut bets at the next Monetary Policy Committee meeting in February, traders began positioning for the rate easing cycle, particularly with the RBI buying INR 600 billion worth of gilts through auction in three tranches till Feb. 20. Moreover, the central bank will buy on-the-run 6.79%, 2034 gilt at the first auction on Thursday.

Traders were expecting the central bank to provide some durable support to the systemic liquidity which has been in deficit since mid-December. On Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--was at INR 3.10 trillion. According to RBI data, the durable liquidity in the banking system as of Jan. 10 was at a deficit of INR 401.02 billion, the lowest level since at least 2020. After the measures were announced, traders who had bet on these measures over the past month said they had no reason to hold on to their bets before the Budget on Saturday and the MPC outcome next week. Moreover, a 25-basis-point repo rate cut was being reflected in the 10-year gilt near 6.65% yield, dealers said.

Trading volumes surged after the trigger from the RBI, with Deutsche Bank saying in a note that the central bank showed a sense of urgency in infusing liquidity. Traders still held on to their bets on a decrease in net supply in FY26, though they said the 10-year gilt yield may not have room to fall below 6.60% in the next two weeks. The market turnover stood at INR 647.10 billion, higher than INR 669.50 billion at 1640 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. 

"The market is showing classic 'buy the rumor, sell the news' move," a dealer at a private bank said. "Another rally from here can only come after the Budget if there is a surprise, or after the Thursday OMO auction because currently no one would want to oversell nor buy aggressively before the events." In an Informist poll of 18 analysts and fund heads, gross borrowing is seen rising on year while net borrowing may fall 3.7% to INR 11.20 trillion. 

Some selling was also triggered owing to an intraday rise in US Treasury yields ahead of the Federal Open Market Committee meeting Wednesday, dealers said. The 10-year benchmark US note rose to 4.57%, from 4.51% at 1730 IST Monday. Traders expect that the liquidity easing measures by the central bank might lead to the yield on shorter tenure papers to see a sharper fall than the longer papers, dealers said.

However, the 7.04%, 2029 and 6.75%, 2029 gilts both underperformed the 10-year benchmark gilt Tuesday as the RBI offered to buy three bonds maturing in 2033 and 2034 in the OMO auction on Saturday. Prices are expected to remain up during the day, and the yield on the 6.79%, 2034 bond is seen at 6.60-6.70%.  (Vidhushi RajPurohit)

India Gilts: Surge as RBI set to infuse durable liquidity, including via OMO

MUMBAI--1000 IST--Prices of government bonds surged after the Reserve Bank of India, after market hours on Monday, announced three measures to infuse durable liquidity in the banking system, dealers said. The yield on the benchmark 10-year bond fell to 6.6254%, its lowest since Feb. 15, 2022.

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 will be held on Thursday, and the bonds to be bought include the benchmark 10-year 6.79%, 2034 gilt. While traders were hoping for an OMO auction since December, most did not expect the benchmark paper to be chosen for the auction, aiding the rise in its price.

Volumes jumped as the announcement boosted expectation of a rate cut by the RBI's Monetary Policy Committee next week, dealers said. The market turnover stood at INR 250.70 billion, higher than INR 144.15 billion at 0930 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform.

"Usually, whenever the RBI does this, (infuses durable liquidity) it is sort of preparing the market for a rate-cut. It is the first step of the rate-cut cycle," a dealer at a private bank said. 

On Monday, the net liquidity injected by the RBI--a proxy for systemic liquidity deficit--was INR 3.10 trillion. The central bank's daily variable rate repo auctions "until further notice" since Jan. 16, coupled with Monday's announcement of a 56-day variable rate repo auction, OMO auctions and a dollar/rupee buy/sell swap auction led market participants to believe that RBI was setting the stage for the MPC to cut the repo rate on Feb. 7. Two of the panel's three external members had already voted for a repo rate cut in December, at a time when all three RBI members voted for a status quo on the rate at 6.50%.

However, state-owned banks sold bonds at a profit as the 10-year gilt yield hit a near-three-year low, capping gains, dealers said. Dealers speculated that state-owned banks were now trimming stock from their 'held-to-maturity' books. Banks can shift up to 5% of the holdings in this portfolio during a financial year to trade. Banks will also sell stock from the 'held-to-maturity' portfolio to the RBI at the OMO auction, which circumvents the 5% limit, dealers said. State-owned banks have been net sellers since Jan. 20, selling gilts worth INR 339.56 billion in the secondary market since then, Clearing Corp. of India data shows.

Purchases by foreign banks on expectations of a rate cut by the MPC might cause a fresh surge in bond prices during the day, dealers said. The yield on the 6.79%, 2034 bond is seen at 6.60-6.70%. (Cassandra Carvalho)

India Gilts: Seen up as RBI announces durable liquidity measures

MUMBAI – Prices of government bonds are seen sharply up after the Reserve Bank of India post market hours Monday announced several measures to infuse durable liquidity into the banking system, including three tranches of open-market purchase of gilts via auction, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.60-6.70%, compared to 6.68% on Monday.

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, the erstwhile 10-year gilts: the 7.18%, 2033 bond and the 7.10%, 2034 bond, and the 7.59%, 2029 bond and the former 14-year benchmark 7.18%, 2037 bond. While dealers were long awaiting the announcement of an OMO auction, they did not expect highly liquid bonds such as the 10-year benchmark to be chosen for the auction, they said. This would aid the rise in the benchmark gilt Tuesday.

The central bank also announced an 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.

The three measures come after the RBI on Jan. 15 announced daily variable rate repo auctions "until further notice" to ease the widening liquidity deficit in the banking system. On Sunday, the net liquidity injected by the RBI--a proxy for systemic liquidity conditions--was INR 3.13 trillion, up from INR 2.72 trillion injected on Friday. 

The RBI's intervention in the foreign exchange market put pressure on the systemic liquidity, dealers said. The central bank's cognisance of the widening deficit and the proactive measures to ease the situation boosted expectations of a rate cut by the RBI's Monetary Policy Committee next week, dealers said. 

On the global front, the yield on the 10-year US Treasury note rose to 4.56% at 0800 IST, from 4.50% at 1700 IST Monday. However, gilt traders were likely to ignore the offshore cue due to the strong domestic cue from the RBI, dealers said. (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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