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Informist, Monday, Feb. 3, 2025

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended higher as traders firmed bets on a 25-basis-point policy rate cut at the upcoming Monetary Policy Committee meeting outcome Friday, dealers said. Trading volumes picked up as the uncertainty surrounding the Union Budget for the financial year 2025-26 (Apr-Mar) passed, and traders added to their gilt portfolios. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.86, or 6.67% yield, against INR 100.62, or 6.70% yield, Friday. A higher-than-expected gross borrowing figure in the Budget led to gilt prices opening slightly lower. However, positive expectations from the rate-setting panel prevailed, keeping gilt prices up sharply.

Traders had lightened their gilt holdings on caution before the Budget. That caution disappeared after just a few trades Monday as the government pegged its fiscal deficit at 4.4% of GDP in FY26, from a downwardly revised 4.8% of GDP in the current fiscal. Traders said they were more confident than ever about a potential repo rate cut following Finance Secretary Tuhin Kanta Pandey's statement Sunday that the government wants the RBI to reduce rates. He noted that decisions made in the Union Budget, presented Saturday, were aimed at ensuring that measures wouldn't be inflationary, paving the way for lower interest rates.

"Market was light, as was evident from the selling we saw since last Tuesday, as traders wanted to go a bit light to the Budget. So, that gave a lot of room for them to add and with such high expectations of a rate-cut in sight, no one wanted to be left behind," a dealer at a primary dealership said.

Significant buying was likely from foreign banks and corporate houses, and some traders speculated about screen-based buying by the RBI as well. Data released Friday showed the central bank bought INR 208.50 billion outside open market operation auctions in the week ended Jan. 24, which was seen by traders as another preparatory measure for a rate cut. However, some selling for profit by state-owned banks capped the gains, keeping the 10-year benchmark gilt yield anchored around the 6.67% level, dealers said.

The gain in short-tenure gilts and the 10-year benchmark gilt, however, did not translate into gains in long-term bonds as traders said the higher borrowing figure in the Budget for FY26 could be concentrated on bonds maturing in 30 years and beyond. A higher figure for switch auction also weighed on long-tenure bonds, dealers said. At the Budget Saturday, the gilt switch auction target was pegged at INR 2.50 trillion in FY26, against INR 1.47 trillion in the current financial year.

"The government has raised the switch target, so there will now be more bonds maturing in the long term once it starts with the auctions, and that the market did not take well for long bonds," a dealer at a state-owned bank said. "The other thing is that demand from mutual funds was also low because of the interest rate risk." The 40-year benchmark yield ended at 7.06%, against 7.05% Friday, and its spread over the 10-year gilt has risen 9 bps since Jan. 24 to 39 bps.

Traders remain unsure of how spreads will play out if the Monetary Policy Committee does cut the repo rate by 6.25%, but broadly expect a steeper yield curve, they said. The 40-year gilt yield could rise to a spread of nearly 50 bps over the 10-year gilt. The spread of the 10-year gilt yield over the five-year benchmark 6.75%, 2029 bond's yield may rise to around 15 bps from a little under 7 bps Monday, dealers said.

The market turnover for the day was INR 711.90 billion, more than double Friday's turnover of INR 336.25 billion, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot Monday, against two trades worth INR 100 million Friday.

FY26 MARKET BORROWING

After the Budget Saturday, traders had expected bond prices to harden in reaction to the government's borrowing ask. The gross market borrowing for FY26 is pegged at INR 14.82 trillion, against INR 14.55 trillion in an Informist poll and a significant rise from INR 14.01 trillion in the current financial year.

Some traders had expected the gross borrowing figure to be lower than the current fiscal, though they counted on the government to conduct a switch operation with the RBI to extend the redemption of nearly INR 1 trillion of bonds maturing in FY26. On Sunday, Economic Affairs Secretary Ajay Seth told Informist the Budget estimate of gilt switch operations for FY26 does not factor in any bilateral debt swap with the RBI, adding that the government will treat bonds held by the central bank like all other redemptions.

This disappointed some sections of the market, as the RBI holding the bonds to maturity would drain core liquidity from the financial system, which does not count the central bank's coffers but includes the government cash balance. A switch would have made liquidity neutral from a durable liquidity perspective, dealers said. Others said this just increases the impetus on the RBI to buy more bonds from the open market to prevent a rundown in its domestic balance sheet, with foreign currency assets already falling due to its dollar sales to protect the rupee.

Meanwhile, traders were enthused about Seth's comment to Informist that the government could conduct buybacks in the next seven-eight weeks, considering its cash position. With further buybacks not accounted for in the Budget, further auctions in the rest of the financial year will bring down the gross borrowing the market will have to absorb in the coming fiscal year. The government pencilled in INR 881.64 billion of buybacks in FY25, the same amount of FY26 gilts it has bought back so far through auction until January.

However, with the market looking to pick up bonds and take position ahead of the rate-setting panel's outcome, the fall in bond prices at the open was quickly bought into. Moreover, the government pegged the fiscal deficit at 4.4% of GDP for FY26, and lowered the target for FY25 by 10 basis points to 4.8% of GDP.

"At the open, the market was in contradiction as the borrowing figure was high, but the fiscal deficit target was lower than expectations," a dealer at a state-owned bank said. Moreover, net borrowing was also slightly lower on year, at INR 11.54 trillion. With the RBI buying gilts outside auction at its quickest pace in four years, traders were not unduly worried about the supply posing a problem to the gilt market amid improving liquidity conditions.

OUTLOOK

On Tuesday, gilt prices may open slightly higher on expectations of a policy rate cut Friday by the Monetary Policy Committee, dealers said. Bonds may also take cues from overnight movement in US yields and crude oil prices. Gilt prices will also be sensitive to the movement of the rupee against the dollar. The rupee ended at a record closing low of 87.1850 against the greenback Monday.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.62-6.70% during the day.

India Gilts: Most gilts remain up; long-term gilts out of favour post Budget

MUMBAI--1602 IST--Prices of most government bonds remained higher and traded in a thin band after the surge in the first half of trade due to expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday. Prices of long-term bonds maturing in 30 years or more fell as the Union Budget for 2025-26 (Apr-Mar) may drive down incremental demand for the securities, dealers said.

The higher than expected gross borrowing target for FY26 would allocate a substantial portion to long-term bonds, as it has over the last few years. The government's ability to borrow in seven years or below is limited due to substantial redemptions lined up in the next few years, dealers said. The gilt switch target of INR 2.5 trillion, against INR 1.47 trillion in FY25, also raised concerns about further issuances of long-term bonds.

Moreover, the Budget announced a tax rebate on personal income tax for income up to INR 1.2 million, but only to taxpayers under the new tax regime introduced in FY21. The new tax regime does not incentivise savings in instruments such as life insurance products, which may drive down demand for such schemes, dealers said.

"The switch target is much higher, the supply is also slightly more," a dealer at a primary dealership said. "For the rest of the market, that's a good thing, but not for long-term bonds. Also, with the tax changes, there's another risk to insurers, that flows for instruments that were provided bond forward-rate agreement demand goes away."

The losses in these bonds were not substantial, as investors considered them a bargain when prices fell, hoping for greater price appreciation in these bonds due to their longer tenures. Tata Mutual Fund fixed income fund manager Akhil Mittal said he prefers the 30- and 40-year benchmark gilts heading into the MPC outcome on Friday. The spread between the 40-year benchmark 7.34%, 2064 gilt's yield over the 10-year benchmark 6.79%, 2034 gilt has widened 8 basis points since Jan. 24 to 38 bps Monday.

Traders remain unsure of how spreads will play out if the MPC does cut the repo rate by 6.25%, but broadly expect a steeper yield curve, they said. The spread of the 10-year gilt yield over the five-year benchmark 6.75%, 2029 bond's yield may rise to around 15 bps from over 7 bps at 1605 IST.

Among on-the-run gilts maturing under 15 years, gains were capped as state-owned banks likely sold bonds at a profit, dealers said. However, most traders were betting heavily on a rate cut and added bonds to their portfolios.

"Even though the switch amount and the short-term borrowing numbers in the Budget was a dampener, the market has absorbed the news and is now focussing on MPC," a dealer at a state-owned bank said. "Also, there are rumours that RBI is still buying on screen even after OMO announcements, and no one can short when they (the RBI) are buying. Some people are also expecting more than a 25 bps rate cut."

The market turnover was INR 639.15 billion, sharply higher than the INR 272.50 billion at 1630 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the remainder of the day, the yield on the 6.79%, 2034 bond is seen at 6.64-6.70%.  (Srijita Bose and Aaryan Khanna)

India Gilts: Up more as traders ramp up buys on view MPC to cut rate Friday

NEW DELHI--1205 IST--Government bond prices rose further as traders, who had reduced their portfolios ahead of Saturday's Union Budget, quickly bought gilts in anticipation of a potential repo rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday, the dealers said. In addition, some short sellers covered their bets as persistent buys drove the 10-year gilt yield below the psychologically crucial 6.68% mark.

"Market is underinvested, especially before the Budget people went light and with such strong rate-cut views in sight, everyone wants to build portfolios before heading to MPC," a dealer at a primary dealership said. "Last week OMO purchases and the data on RBI buys has also added positives today (Monday)."

Traders said they are now more confident than ever about a potential repo rate cut following Finance Secretary Tuhin Kanta Pandey's statement on Sunday that the government wants the RBI to reduce rates. He noted that decisions made in the Union Budget, presented Saturday, were aimed at ensuring measures wouldn't be inflationary, paving the way for lower interest rates. According to dealers, the 10-year gilt yield could drop to at least 6.60% if the RBI's Monetary Policy Committee opts to cut the policy repo rate by 25 basis points from its current 6.50%.

Gilt prices surged despite the government setting a higher than expected gross borrowing target of INR 14.82 trillion for 2025-26 (Apr-Mar) against INR 14.01 trillion budgeted for the ongoing year. According to traders, there is sufficient demand for the anticipated supply, and the gross borrowing target could be revised lower if the government conducts a bilateral switch with the RBI, which holds bonds aggregating INR 1 trillion maturing in FY26. A switch operation entails replacing a security maturing in the near term with a longer-maturity paper, effectively postponing the government's debt repayment to a later date. Even if the central bank's bond holdings are not switched, the scheduled fall in its domestic assets is likely to spur greater open market buys, which have totalled over INR 500 billion since mid-January, dealers said. 

Foreign portfolio investors were likely on the buying side for the second straight day, betting on gilt prices to rise further after a rate cut on Friday, dealers said. Traders from state-owned banks were also likely buyers, though balance sheet managers may be trimming gilts at a profit as the 10-year gilt yield hit 6.66%, they said.

The market turnover was INR 392.15 billion, sharply higher than the INR 116.05 billion at 1200 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 6.64-6.70%.  (Aaryan Khanna)

India Gilts: Up as fin secy's comments boost hope of rate cut by MPC Fri

India Gilts: Up as fin secy's comments boost hope of rate cut by MPC Fri
 

MUMBAI--1030 IST--Prices of government bonds opened lower, but rose after Finance Secretary Tuhin Kanta Pandey said the Union Budget for 2025-26 (Apr-Mar) left enough room for the Reserve Bank of India to cut rates, reinforcing bets on a 25-basis-point repo rate cut on Friday, dealers said. Gilts opened slightly lower as the government's gross borrowing aim for FY26 was higher than both the current fiscal and the market's view.

Had the government taken the revenue expenditure route to boost demand, its inflationary nature would have been "counterproductive" as "the government wants the RBI to reduce rates and RBI must see the impact on inflation", Pandey told Informist in an interview Sunday. Traders were already betting on a rate cut, and the top finance ministry official's comments cemented the view that the RBI's Monetary Policy Committee will cut the policy rate on Friday for the first time in nearly five years, dealers said.

"The Budget didn't have anything too negative for gilts and the Finance Secretary has also said that we need rate cuts...So I think we're definitely going to see a rate cut on Friday," a trader at a primary dealership said.

The gross market borrowing for FY26 was pegged at INR 14.82 trillion, against INR 14.55 trillion in an Informist poll and a significant rise from INR 14.01 trillion in the current financial year, which some traders had expected to be brought down. However, the supply was well within the market's appetite even without significant foreign investment, and net supply was lower on year at INR 11.54 trillion.

Moreover, with the RBI infusing liquidity into the banking system, including through open market gilt purchases, both demand and traders' interest in buying bonds had increased. The RBI has bought over INR 500 billion in gilts since Jan. 15, including INR 200.20 billion at auction on Thursday. Data released Friday showed the central bank bought INR 208.50 billion outside open market operation auctions in the week ended Jan. 24, which was seen by traders as another preparatory measure for a rate cut.

The market turnover was INR 209.65 billion, sharply higher than the INR 38.95 billion at 1030 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 6.79%, 2034 bond is seen at 6.68-6.75%.  (Cassandra Carvalho)

India Gilts: Seen down on higher FY26 govt borrow; rate cut view to cap losses

MUMBAI – Prices of government bonds are seen opening lower Monday owing to the higher-than-expected borrowing announced by the government for 2025-26 (Apr-Mar), in the Budget presented by Finance Minister Nirmala Sitharaman on Saturday, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.68-6.75%, compared to 6.70% on Friday. In FY26, the government will borrow INR 14.82 trillion through the sale of dated securities on a gross basis. On a net basis, the government will sell bonds worth INR 11.54 trillion, which accounts for repayments worth INR 3.28 trillion. Traders expected a gross borrowing figure in the range of INR 14.00-14.50 trillion, dealers said. An Informist poll estimate of 15 analysts saw the figure at INR 14.50 trillion, with poll median of 18 officials estimating the net borrowing figure at INR 11.20 trillion. 

However, the losses in bond prices may be capped by traders' expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee this week, dealers said. The FY26 Union Budget tried to offer much-needed impetus to the economy through a "non-inflationary" route of cutting income tax, rather than more revenue expenditure in a bid to give room to the RBI to lower interest rates, Finance Secretary Tuhin Kanta Pandey told Informist in an interview Sunday. 

The MPC will meet for three days beginning Wednesday, with the outcome due on Friday. The panel will be headed by RBI Governor Sanjay Malhotra. Deputy Governor Rajeshwar Rao 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. 

Prices may also recover from losses during the day on positive data from the RBI's weekly statistical supplement released Friday, dealers said. The data showed that the RBI bought gilts worth INR 208.50 billion outside open market operation auctions in the week ended Jan. 24. This was the second straight week of significant central bank purchases via on-screen secondary market operations, and the largest such buy since the week ended Feb. 12, 2021. With the slew of liquidity measures announced after over a month of a deficit, traders view Deputy Governor Rao as more proactive in providing adequate liquidity to the banking system.

On the global front, US yields were slightly lower despite US President Donald Trump's imposition of tariffs on Mexico, Canada and China. The yield on the 10-year US Treasury note was at 4.50% at 0820 IST from 4.53% at 1700 IST Friday. Trump imposed 25% tariffs on Canada and Mexico, and 10% on China, with the order to take effect Tuesday-—in Eastern Time. While US yields were little changed, bond prices may take cues from the order by tracking the movement of the rupee against the dollar during the day. Following Trump's move, the dollar index strengthened, and the rupee is expected to open sharply lower, dealers said.  (Cassandra Carvalho)

End

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

Edited by Rajeev Pai

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