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Informist, Friday, Feb. 7, 2025

By Srijita Bose

MUMBAI – Prices of government bonds ended sharply lower despite a 25-basis-point rate cut by the Reserve Bank of India's Monetary Policy Committee as traders were disappointed by the lack of additional liquidity boosting measures by the central bank on Friday. Cut-off prices at the INR 220 billion auction were also poorer-than-expected as traders refrained from picking up large chunks of fresh stock on uncertainty around future rate cuts, dealers said. 

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.59, or 6.70% yield, against INR 100.93, or 6.66%, Thursday. Gilt prices slumped immediately after the RBI Governor Sanjay Malhotra began his statement on the MPC's decision as traders had already priced in much more than a 25-bps rate cut by the panel, dealers said. The decision to cut rates was unanimous, but traders were unsure whether to expect another rate cut at the next meeting in April as the panel kept the stance unchanged at 'neutral', dealers said.

"The market had priced in much more than just a cut," a dealer at a private bank said. "Only some papers, where people did not take aggressive positions and some of the shorter tenure gilts saw a relatively limited fall."

Traders sold gilts across tenures as they had already priced in a rate cut but expected the MPC to shift to an accommodative stance. They had also anticipated measures to inject durable liquidity into the banking system. The fall in prices on off-the-run benchmark gilts was, however, limited as these gilts offered a lucrative spread over the 10-year benchmark, they said. Traders also likely also added gilts to their held-to-maturity portfolios as prices of gilts fell, dealers said.

With the unanimous repo rate cut, traders were still confident the policy rate would fall further, provided there were no shocks on the inflation front. Potential liquidity infusion measures from the RBI in the coming weeks also kept losses limited in sub-three-year bonds, dealers said. The RBI is expected to continue its screen-based open market buys in addition to the INR 400 billion of gilt buys at OMO auctions announced. Even on Friday, traders speculated the RBI was buying the 6.79%, 2039 gilt near the day's low of INR 100.55, hit after the result of a poor auction.

The 10-year benchmark gilt's yield rose the most across tenures Friday as it was expected to gain sharply from any fresh measures on liquidity announced, particularly an OMO calendar. In its first OMO auction in over three years on Jan. 30, the central bank bought INR 50 billion of the 6.79%, 2034 bond – over a quarter of the total offers it accepted.

At the auction, cut-off prices on the 6.92%, 2039 bond and 7.09%, 2054 bond at the auctions were both sharply lower than the median of an Informist poll. While traders held mixed feedback on the demand for the 15-year gilt at the auction, the lower price cut-offs for the 30-year gilt at the auction was a surprise, dealers said. 

For the 15-year gilt, dealers said that demand from banks for the gilt at auction was muted due to uncertainty on future rate cuts. Demand from state-owned banks was also subdued at the auction as they picked up bonds at a cheaper price on the secondary market, dealers said. Additionally, several traders had already picked up the gilt earlier this week hoping for greater gains in its price than the 10-year gilt after the MPC, and had been left disappointed.

The 30-year gilt also did not receive active buying demand from mutual funds and insurance firms. Demand for bond forward-rate agreements was expected to be firm at Friday's auction, after RBI Governor Sanjay Malhotra said final bond forward guidelines would be announced shortly, dealers said. Though traders expect demand for long-term bonds to improve over the upcoming months, the demand for forward rate agreements by insurers was lesser than the INR 40 billion expected for the INR 100 billion supply of the 2054 gilt. Absence of aggressive bids from a large state-owned life insurer at the auction also dragged down demand at the auction, dealers said.

"There was an expectation that LIC (Life Insurance Corp. of India) will be there at the auction after their FRA test trade yesterday (Thursday)," a dealer at a primary dealership said. "FRA demand was also lower, and natural demand was lower from insurance (companies) and PFs (pension funds)."

Meanwhile, foreign banks and investors likely remained on the sidelines before the release of the non-farm payrolls data, due post market hours Friday, dealers said. Private banks also likely refrained from placing aggressive bets before the job prints from the US, waiting for further cues to trade, after the initial sell-off post MPC announcement, they said. 

The market turnover Friday was INR 687.50 billion, against INR 466.15 billion the previous day, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot, same as Thursday.

OUTLOOK

Gilts are not traded on Saturday. On Monday, gilt prices may take cues from the movement of US Treasury yields after the US employment report for January and non-farm payrolls data for cues on further rate cuts by the US Federal Open Market Committee.

Prices may fall further on Monday should the disappointment from the lack of liquidity measures by the RBI linger, though losses will be limited after the rate cut. Traders may pick up bonds as funding costs ease sustainably towards the new 6.25% repo rate, which will make spreads across the yield curve more attractive.

Gilt prices may take cues from the movement in the rupee against the dollar, as well US President Donald Trump's comments on political and economic measures. Crude oil prices may also be a trigger, dealers said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.75% during the day.

India Gilts: Remain down on lack of stance change, liquidity measures at MPC

MUMBAI--1401 IST--Government bond prices remained sharply down as traders were disappointed by the lack of additional liquidity boosting measures by the Reserve Bank of India on Friday, dealers said. Despite a 25-basis-point rate cut by the RBI's Monetary Policy Committee, traders were unsure whether to expect another rate cut at the next meeting in April as the panel kept the stance unchanged at 'neutral', they said.

"What was needed is a liquidity boost right now, so even with the cut, the market was not happy," a dealer at a private bank said. "Plus, before the auctions, the market is a little range bound, but some of the market is still hoping for another rate cut in April." 

Traders sold gilts across tenures as they had already priced in a rate cut but expected additional change in stance and liquidity measures which were not brought about by the MPC, dealers said. The fall in prices on off-the-run benchmark gilts was, however, limited as the spread on these gilts over the benchmark was lucrative to hold, they said.

The six-member panel cut the repo rate for the first time since May 2020, after keeping the rate unchanged since February 2023. This was the first interest-rate decision for Malhotra, who took charge as the 26th RBI governor in December and for Deputy Governor M. Rajeshwar Rao, who was allocated the monetary policy department on Jan. 15. The unanimous rate cut vote was a positive for the market, after the previous two decisions of keeping rates unchanged had dissenting votes on rate cuts, dealers said. 

After the policy outcome and press conference, traders shifted focus to the INR 220 billion gilt auction, which was held at 1230-1330 IST. The government had offered to sell INR 120 billion of the 6.92%, 2039 bond and INR 100 billion of the 7.09%, 2054 gilt at the auction. Demand for the 30-year benchmark gilt was seen firm from life insurers and pension funds, especially as prices fell, dealers said. After Malhotra said final bond forward guidelines will be announced shortly, traders expect demand for long-term bonds to improve over the upcoming months. 

With Life Insurance Corp. of India publicly announcing their intention to enter bond forward-rate agreements, the RBI's formal measures may encourage the state-owned life insurance company to also lock in current yield levels, dealers said. Demand for bond forward-rate agreements is expected to be robust at Friday's auction, as insurers will not delay their purchases for the final bond forward guidelines and that market may only develop in FY26, they said. 

"Overall, demand at the auction might be good as there has been so much selling now after the MPC that traders have space now to pick the bonds at auction," a dealer at a private bank said.

However, feedback on demand for the 6.92%, 2039 bond at auction was mixed. While some dealers said that traders will look to pick up the bond cheaper at the auction, others said that due to uncertainty on future rate cuts, demand from banks for the gilt at auction could be muted. Moreover, several traders had picked up the gilt earlier this week hoping for greater gains in its price than the 10-year gilt after the MPC, and had been left disappointed.

The market turnover was INR 483.00 billion, against INR 279.75 billion at 1330 IST Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 6.79%, 2034 bond is seen at 6.65-6.78% for the rest of the day.(Srijita Bose)

India Gilts: Slump as MPC retains stance, traders don't see big cuts ahead

MUMBAI--1019 IST--Government bond prices slumped despite a 25 basis point rate cut by the Reserve Bank of India's Monetary Policy Committee as the panel maintained its stance at 'neutral', and refrained from changing it to 'accommodative'. Moreover, the committee's continued focus on aligning inflation with the target tempered hopes of rate cuts in future, dealers said. The first rate cut in five years failed to lift the market's spirits as the move was already priced in, dealers said.

Another source of disappointment for the market was the absence of any measures to ease liquidity conditions, dealers said. Traders had hoped for an announcement of large scale bond purchases under open market operations by the central bank.

"The MPC did not change its stance even after cutting rates, and no announcement on liquidity, so market is negative right now," a dealer at a private bank said. RBI Governor Sanjay Malhotra did not announce any new measures to reduce liquidity deficit in the banking system, despite a cash crunch that has been in place since mid-December. On Thursday, net liquidity injected by the RBI — a proxy for systemic liquidity deficit – was INR 697.55 billion against INR 450.06 billion on Wednesday.

The market turnover was INR 267.55 billion, against INR 155.50 billion at 1030 IST Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 6.79%, 2034 bond is seen at 6.65-6.78% for the rest of the day. (Cassandra Carvalho)

India Gilts: Steady on caution before MPC outcome; 25 bps rate cut priced in

MUMBAI--0913 IST--Prices of government bonds were steady on caution before the outcome of the Reserve Bank of India's policy review meeting at 1000 IST, dealers said. The 10-year benchmark gilt opened higher but gains were immediately erased as traders booked profits, dealers said.

Bond traders have priced in 80-90% probability of a 25 basis points rate cut by RBI Governor Sanjay Malhotra, dealers said. A minority of traders expect a 50 bps cut, while some don't expect a rate cut at all. Traders also expect the RBI to announce additional measures, such as a calendar for open market purchases of gilts, to ease the liquidity deficit in the banking system, dealers said. On Thursday, net liquidity injected by the RBI — a proxy for systemic liquidity deficit – was INR 697.55 billion against INR 450.06 billion on Wednesday.

Dealers also said that if the governor announces a 25 bps cut in the repo rate, but does not introduce any additional liquidity measures, bond prices may fall since the former has already largely been priced in.

"The rate cut is there in line...but depending on the outcome of the policy, I'm expecting market to be volatile today. It (the yield on the benchmark 10-year 6.79%, 2039 gilt) could be five to ten basis points up or down," a dealer at a private bank said.

Traders also expect the RBI to announce the final guidelines for bond forwards in the Statement on Developmental and Regulatory Policies to be released along with the policy decision. The Fixed Income Money Market and Derivatives Association of India were said to have discussed the measure last week and passed on recommendations to the RBI, dealers said. The draft norms were released in December 2023.

Caution ahead of the MPC outcome kept the market turnover low at INR 26.95 billion, compared with INR 75.60 billion as at 0930 IST 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 6.60-6.70%. (Cassandra Carvalho)

India Gilts: Seen steady on caution before MPC meeting outcome at 1000 IST

MUMBAI - Prices of government bonds are seen opening steady on Friday on caution ahead of the outcome of the three-day meeting of the Reserve Bank of India's Monetary Policy Committee at 1000 IST, dealers said. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.60-6.70%, compared to 6.66% on Thursday. The recently-appointed RBI Governor Sanjay Malhotra will present his first monetary policy. Gilt traders largely expect him to announce a repo rate cut of 25 basis points, along with additional measures to boost systemic liquidity such as a calendar for open market purchase of gilts, dealers said. If the governor does announce a rate cut cut, it will be the first reduction since May 2020. According to an Informist poll, 12 of the 14 economists polled see the policy rate being cut by 25 bps Friday.

The six-member rate-setting panel's voting patterns will also be watched. Along with the governor, this will be the first MPC meeting for Deputy Governor M. Rajeshwar Rao with temporary charge of the Monetary Policy Department following Michael Patra's retirement. Most gilt traders felt that if a rate-cut decision is made, it would likely be unanimous.

Two external members Ram Singh and Nagesh Kumar had voted for a reduction in the repo rate in December, and dealers speculate that the third external member Saugata Bhattacharya may also do so at this meeting. Bond yields have priced in an 80-90% chance of a rate cut to be announced Friday, dealers said.

While most traders have hedged their positions, there are a few who are entering the policy outcome unhedged, dealers said. The risk from being unhedged may trigger stop losses, if the outcome is not as per their view, dealers said. Dealers also said that if the governor announces a 25 bps cut in the repo rate, but does not introduce any additional liquidity measures, bond prices may fall since the former has already largely been priced in. In January, the RBI announced a series of measures to ease the liquidity deficit in the banking system; including around INR 600 billion worth of open market purchase of gilts via three auctions. 

The past two weeks have seen volatile trade due to differing views on the Budget for 2025-26 announced on Saturday, and the MPC outcome this week. With the uncertainty on the latter persisting until 1000 IST, bond traders are unsure of how strong the demand at the weekly bond sale could be. The government will sell INR 120 billion of the 6.92%, 2039 bond and INR 100 billion of the 7.09%, 2054 bond at 1230-1330 IST, with the underwriting auction for the same scheduled for 1030 IST-1100 IST.   

On the global front, the yield on the 10-year benchmark US Treasury note was little changed, at 4.44% at 0744 IST from 4.45% at 1700 IST Thursday. This fall in the US yields overnight could cause a slight rise in bond prices at market open. The movement of the rupee against the dollar could lend cues to bond prices during the day, dealers said. The rupee fell to a record closing low of 87.5775 against the dollar on Thursday. A falling rupee could weigh on bond prices due to concerns about imported inflation and further currency weakness after a possible rate cut. (Cassandra Carvalho)

End

US$1 = INR 87.4250

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

Edited by Akul Nishant Akhoury

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