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Informist, Wednesday, Feb. 5, 2025

By Vidhushi RajPurohit

MUMBAI – Government bond prices ended higher tracking a fall in US Treasury yields and on account of traders positioning for a repo rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday, dealers said. However, the sharp depreciation in the Indian rupee against the dollar kept the gains capped. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.89, or 6.66% yield, against INR 100.81, or 6.67%, on Tuesday. The MPC's three-day meeting began Wednesday, leading to some caution in the market ahead of the outcome. 

Foreign portfolio investors likely bought bonds expecting a rate cut this week and due to the fall in US yields. The yield on the benchmark 10-year US Treasury note fell to 4.48% at 1630 IST Wednesday from 4.58% at the close of Indian market hours Tuesday. 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.

Foreign portfolio investors have bought nearly INR 140 billion of fully accessible route bonds over the past week, ahead of the rate decision and after the inclusion of Indian bonds on Bloomberg's emerging market local currency bond index. FPIs also continued to pick up gilts in shorter tenures on expectations of further steepening in the yield curve as the MPC cuts rates on Friday, dealers said.  

The fall in US yields was coupled with confidence about the MPC cutting the repo rate for the first time in nearly five years, dealers said. Some traders also hoped for as much as a 50 basis points cut in the policy rate of 6.50%, as India's GDP growth is seen falling to a four-year low of 6.4% in 2024-25 (Apr-Mar), and CPI inflation expected to ease down to the RBI's target of 4% in the coming quarters. Two members of the six-member panel had voted for a 25 bps rate cut in December.

"Looking at the current GDP growth, a 25 bps cut will fall too short to make a substantial impact, so some dealers are currently hopeful about not only a rate cut but also about a higher slash as well," a dealer at a primary dealership said.

Hopes of a rate cut have been up since Finance Secretary Tuhin Kanta Pandey on Sunday said that the government wants the RBI to reduce rates. Pandey said the Budget provided the much-needed impetus to the economy through a "non-inflationary" route of cutting income tax, paving the way for lower interest rates. Bond prices had surged on Monday as traders rushed to build up their portfolios. 

Gains in gilts were capped by a depreciating rupee as it touched a lifetime low of 87.4900 a dollar. A fall in the domestic currency is seen as negative for gilt prices. Depreciation of the rupee also led the RBI to intervene in the foreign exchange market with its dollar sales, which might put strain on the systemic liquidity, dealers said.  

Net liquidity injected by the RBI — a proxy for systemic liquidity deficit – was at INR 382.16 billion on Tuesday, the lowest level since Jan. 5. The improvement in the liquidity was aided by the central bank's open market gilts purchases at auction and in the secondary market, the daily variable rate repo auctions and the dollar/buy-buy/sell swap auction.

The RBI's focus on improving the liquidity conditions was seen by traders as a precursor to a rate cut. However, traders feared that a fall in the rupee could again reverse the narrowed deficit and lead to a delay in the repo rate cut by the MPC. Short-term bonds, which had gained on Tuesday while the rest of the market fell, did not move much as the positivity on both liquidity and rates had been factored into prices, dealers said.

"Liquidity has eased after month-end inflows and RBI's auctions, but it might reverse if the rupee falls and then there will also be tax outflows," a dealer at a state-owned bank said. "So, liquidity might still be a concern going ahead even if it has moderated now."

Some traders also feared that inflation might still be above the RBI's tolerance for a rate cut, with the policy views of both RBI Governor Sanjay Malhotra and RBI Deputy Governor Rajeshwar Rao a mystery as they will be attending their first MPC meeting. Former RBI governor Shaktikanta Das had insisted on consumer inflation aligning with the central bank's 4% target before cutting rates. The RBI's projections for CPI inflation show the headline reading at or above 4% in the coming quarters up to Jul-Sept. The latest print, for December, showed headline CPI inflation at 5.22%.

The uncertainty on the global front due to US President Donald Trump's policies may also hold back the rate-setting panel from monetary policy easing through a rate cut, dealers said. 

After underperforming the 10-year benchmark earlier this week, bonds maturing in over 30 years were in demand from life insurers and mutual funds as they expect a higher price appreciation as interest rates fall. The 40-year gilt yield's spread over the 10-year yield had widened nearly 10 basis points between Jan. 24 and Tuesday, and investors said the current spreads were lucrative enough to carry into the policy outcome. 

The market turnover for the day was INR 623.85 billion, higher than Tuesday's INR 422.90 billion, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were two trades worth INR 100 million using the wholesale digital rupee pilot on Wednesday, against no trades Tuesday.

OUTLOOK

On Thursday, gilt prices may track US Treasury yields at the open, dealers said. Traders also await the US ADP National Employment Report for January due at 1845 IST. Prices may remain slightly higher on expectations of a policy rate cut on Friday by the Monetary Policy Committee.  

Traders will also remain cautious regarding the movement of the rupee against the dollar after it closed at a record closing low of 87.4650 a dollar on Wednesday. Market participants will also eye US President Donald Trump's comments on future tariffs.

Bonds may also take cues from crude oil prices. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.64-6.70% during the day.

India Gilts: Remain up as US ylds fall; rupee slump to record low caps gains

MUMBAI--1600 IST--Government bond prices remained higher as the yield on the 10-year US Treasury note fell sharply. However, gains in gilts were capped as the fall in the rupee to a record low led some traders to trim their exposure ahead of the outcome of the Reserve Bank of India's Monetary Policy meeting on Friday, dealers said.

State-owned banks are likely to have sold bonds at a profit as the yield on the 10-year benchmark 6.79%, 2034 gilt neared 6.65%, its lowest in a week. Traders were also short-selling liquid bonds such as the 2034 gilt on caution ahead of the policy decision. Fears of imported inflation rose as the rupee fell to a record low of 87.49 to a dollar, dropping over 2% already in 2025, dealers said.

As the RBI's rate-setting panel decides on whether to cut the repo rate after keeping it at 6.50% since February 2023, the constant fall in the rupee remains a concern that could sway the decision against the marketwide expectations of a 25-basis-point rate cut on Friday, they said. A fall in the currency is expected to generate greater capital outflows after investors take profits and domestic yields fall. 

"The overall (yield) curve has shifted down as the MPC (meeting outcome) draws closer," a dealer at a primary dealership said. "But the rupee is a dampener even though US yields falling has brought in some offshore flows."

Foreign portfolio investors have bought nearly INR 140 billion of fully accessible route bonds over the past week. FPIs also continued to pick up gilts in shorter tenures on expectations of further steepening in the yield curve as the MPC cuts rates on Friday, dealers said.  

After underperforming the 10-year benchmark earlier this week, bonds maturing in over 30 years were favoured by life insurers and mutual funds as they expect a higher price appreciation as interest rates fall. The 40-year gilt yield's spread over the 10-year yield had widened nearly 10 basis points between Jan. 24 and Tuesday, and investors said the current spreads were lucrative enough to carry into the policy outcome. 

The market turnover was INR 558.90 billion, higher than INR 374.70 billion at 1530 IST Tuesday, 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)

India Gilts: Remain up as US yields ease, confidence builds on rate-cut bets

MUMBAI--1345 IST--Prices of government bonds remained up as US Treasury yields fell overnight, and eased further intraday. Traders' hopes for a policy rate cut grew stronger after liquidity conditions improved, dealers said. However, gains were capped as some traders assumed a cautious stance ahead of the Reserve Bank of India's Monetary Policy Committee meeting's outcome Friday.

The yield on the benchmark 10-year US Treasury note dipped below 4.50% from 4.58% at the close of Indian market hours Tuesday. Moderation in US yields also raised traders' expectations of foreign inflows into the gilt market, which have picked up over the past week due to interest from both active and passive investors ahead of a potential rate cut in India and gilts' inclusion in Bloomberg's local currency emerging market index. Since Thursday, foreign portfolio investors have bought INR 138.75 billion worth of index-eligible fully accessible route bonds, Clearing Corp. of India data showed.

"Liquidity conditions have improved significantly, so that has furthered expectations of a 25-basis-point repo cut, but till the day of the outcome some caution will be there in the market and that is keeping prices in check," a dealer at a private bank said. Net liquidity injected by the RBI — a proxy for systemic liquidity deficit – was at INR 382.16 billion on Tuesday, the lowest level since Jan. 5.

The RBI's proactive measures aimed at infusing liquidity by way of open market operations, the daily variable rate repo auctions and a 56-day variable rate repo auction are seen as a preparatory step for a rate cut, dealers said. On Tuesday, around INR 450 billion worth of inflows from the settlement of RBI's dollar/rupee buy/sell swap auction helped in easing liquidity and overnight rates, which also spurred demand for short-term bonds.

Some traders said there was a chance that the Monetary Policy Committee would not cut rates as members may still be concerned about higher-than-target inflation and a weakening rupee. The RBI's projections for CPI inflation show the headline reading at or above the medium-term target of 4% in the coming quarters up to Jul-Sept, while the rupee on Wednesday hit a record low of 87.4675 a dollar. The uncertainty on the global front due to US President Donald Trump's policies may also hold back the rate-setting panel from monetary policy easing through a rate cut, dealers said.

The market turnover was INR 427.90 billion, higher than INR 224.50 billion at 1230 IST Tuesday, 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%. (Vidhushi RajPurohit)

India Gilts: Up on fall in US yields; caution as 3-day MPC meet begins

MUMBAI--1011 IST--Prices of government bonds were up tracking an overnight fall in US Treasury yields. Gains were capped on caution ahead of the monetary policy outcome, with the three-day meeting of the Reserve Bank of India's Monetary Policy Committee beginning Wednesday, dealers said.

The yield on the benchmark 10-year US Treasury note fell to 4.51% at 1011 IST, from 4.58% at the close of Indian market hours Tuesday. US yields fell overnight after jobs data in the US indicated a slight slowdown in the US labour market. The pause in US President Donald Trump's imposition of tariffs on Mexico and Canada also aided the fall in US yields, dealers said.

Most traders still expect the MPC to deliver a long-awaited repo rate cut of at least 25 basis points at the outcome of its three-day meeting on Friday. Traders have already built portfolios on these expectations, and preferred bonds maturing up to five years while placing short bets on longer-tenure gilts, dealers said.

"Above INR 100.85 there is good buying interest (in the 6.79%, 2034 gilt), if it had opened below that there would've been immediate selling," a dealer at a private bank said. "Traders are just positioning closer to MPC, swaps are also falling." The five-year overnight indexed swap rates fell 2 basis points to 6.05%.

Some traders shed bonds as prices rose, wary that the MPC may avoid cutting the repo rate this week. Traders are unsure of the monetary policy stance of both RBI Governor Sanjay Malhotra and RBI Deputy Governor Rajeshwar Rao, both attending their first MPC meetings and having made no public comments on monetary policy recently. While much of the market said the RBI's recent measures, including open market gilt buys in the secondary market and auction, were a precursor to a rate cut, others said the central bank may opt for only liquidity measures rather than a rate cut to ease financial conditions.

While most short-term papers were not being traded yet, gains in the 7.04%, 2029 and 6.75%, 2029 papers were limited since traders had already purchased stock of these bonds earlier this week, pricing in a rate cut on Friday. Short-term bonds are more sensitive to rate cuts, and traders expect a "bull-steepening" of the yield curve – wherein shorter-term rates fall faster than the longer-end. The RBI's steps over the past three weeks to inject liquidity contributed to conditions easing and increasing demand for short-term bonds. On Tuesday, the net liquidity injected by RBI fell to the lowest level since Jan. 5. Net liquidity injected — a proxy for systemic liquidity deficit – was at INR 382.16 billion on Tuesday against INR 1.08 trillion on Monday.

The market turnover was INR 133.90 billion, higher than INR 106.55 billion as at 1030 IST Tuesday, 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%. (Cassandra Carvalho)

India Gilts: May open slightly up as US ylds fall; rate cut bets to continue

MUMBAI - Prices of government bonds are seen opening slightly higher Wednesday tracking an overnight fall in US Treasury yields, dealers said. Gilt traders may continue to bet on a rate cut by the Reserve Bank of India's Monetary Policy Committee on Friday. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.64-6.70%, compared to 6.67% on Tuesday. 

The yield on the benchmark 10-year US Treasury note fell to 4.52% at 0800 IST, from 4.58% at the close of Indian market hours Tuesday. 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.

The Job Openings and Labor Turnover Survey for December, released by the US Bureau of Labor Statistics post market hours Tuesday showed that job openings declined more than the consensus estimates, indicating a slight slowdown in the US labour market. Traders now await the US employment report for January, due post market hours Friday, for non-farm payrolls data for cues on further rate cuts by the US Federal Open Market Committee. The FOMC kept rates unchanged at its meeting last week. 

Meanwhile, the three-day meeting of the MPC begins Wednesday, and traders may continue to bet on a rate cut at its outcome on Friday. While a fall in US yields may lend cues at market open, traders may focus on positioning ahead of MPC meeting outcome for the rest of the day. At least 80-90% chances of a rate cut this week have been priced in, dealers said. However, some dealers feel MPC will not cut rates this week but the RBI would instead focus on introducing more measures to ease the liquidity deficit.    

Foreign inflows into gilts during the day may cause a rise in bond prices, dealers said. On Tuesday, foreign portfolio investors purchased gilts worth INR 18.54 billion via the fully accessible route, Clearing Corp. of India data showed. The rise in the rupee against the dollar Tuesday likely made investments by FPIs lucrative, dealers said. The movement of the rupee may also lend cues to bond prices Wednesday.  (Cassandra Carvalho)

End

US$1 = INR 87.47

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

Edited by Saji George Titus

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