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Informist, Wednesday, Feb. 12, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended steady despite a lower-than-expected headline inflation print for January as the data did not materially change the market's outlook on interest rates, dealers said. The Reserve Bank of India is widely expected to lower interest rates by another 50 basis points, with a 25-bps rate cut expected in April. 

Data released an hour before market close showed India's headline CPI inflation fell to a five-month low of 4.31% in January from 5.22% in December, led by lower vegetable prices. An Informist poll of 12 economists had projected January CPI inflation at 4.5%.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.61, or 6.70% yield, against INR 100.63, or 6.70% yield, Tuesday. Bond prices traded in a thin band during the day due to caution ahead of the inflation data, but failed to notch up gains despite the comforting print.  

Most traders had priced in the 4.3% figure, the closest one to the RBI's medium-term target of 4% since August. The disinflation in January was largely led by vegetable prices, which fell 15.7% on month, and pulses prices, which declined 2.1% from December. 

A few traders who had earlier sold bonds fearing a CPI print higher than 4.5% replenished their holdings in light volumes, which caused a minor uptick in prices after the data, dealers said. Some dealers were disappointed about the rise in core inflation, which inched up to 3.7% from 3.6% in December.  

"We're looking more at liquidity measures now since this was largely priced in. Core inflation is also slightly higher so that offsets the lower (January CPI) data," a dealer at a state-owned bank said. 

Price movement was also limited as traders were cautious before US CPI for January due at 1900 IST, for cues on rate cuts in the US. The US Federal Open Market Committee left rates unchanged at its meeting last month, and US Federal Reserve Chair Jerome Powell Tuesday said the US central bank was in no rush to cut interest rates further.

Positioning was light ahead of the CPI print and profit booking erased the brief rise in prices after the inflation data. Ahead of the US CPI print and the uncertainty on the geopolitical front from US President Donald Trump's tariff threats, dealers said they were not comfortable building up trading books despite the comfort from the fall in domestic inflation.

"The problem is that people are still not ready to buy at levels sub-70 (yield below 6.70% on 6.79%, 2034 bond)," a dealer at another state-owned bank said. "Otherwise some rally would've been there today (Wednesday) because the data was lower (than expectations)."

Foreign banks and primary dealerships were profit-booking in short-term bonds. Foreign portfolio investors sold gilts worth INR 13.63 billion via the fully accessible route Wednesday, according to data from the Clearing Corp. of India at 1738 IST. FPIs were likely trimming gilts maturing within the next two years, which were absorbed by the domestic traders, especially by mutual funds. Trade volumes in bonds maturing in the next two years rose, particularly as they offered higher yields than Treasury bills at auction, dealers said.

Cut-off yields on the 182-day and 364-day Treasury bills were higher than expected as traders looked to pick up gilts of similar maturities. The 5.63%, 2026 bond that matures two months after the 364-day T-bill, yielded 6.59% at close against the 6.55% cut-off for the 364-day T-bill. According to an Informist poll, the median cut-off on 364-day T-bill was seen at 6.53%. 

The doubling in the size of Thursday's OMO auction to INR 400 billion had been priced in on Tuesday and did not lead to significant activity, dealers said. The market expects the RBI to announce further liquidity infusion measures, including doubling the size of the OMO auction on Feb. 20 as well. These expectations have only grown after the RBI's aggressive dollar sales on Monday and Tuesday, though the outlook on liquidity remains bleak until March-end, dealers said.

With no significant movement after the inflation print, traders now look to growth numbers at the end of the month for cues on rate cues. "See (the fall in) vegatable inflation was not a surprise, we're looking more at GDP growth data now, because to spur growth we'll need a rate cut," a dealer at a private bank said. India GDP data for Oct-Dec and the second advance estimate for FY25 is due on Feb. 28.

Short bets on the 10-year benchmark 6.79%, 2034 gilt continued to rise, ahead of the bond's last scheduled auction this financial year on Friday. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data showed trades worth INR 132.25 billion in the gilt at 1740 IST, up from INR 128.16 billion around the same time Tuesday.

The market turnover Monday was INR 283.85 billion, against INR 405.30 billion Tuesday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot Wednesday.

OUTLOOK

On Thursday, gilt prices are likely to open lower tracking an overnight rise in US Treasury yields after the release of the US CPI inflation data for January, dealers said. The consumer price index rose 0.5% on month, against a Dow Jones estimate of 0.3%.

The higher-than-expected reading may lower the expectations on the US Federal Open Market Committee cutting rates in the first half of this year. The FOMC left rates unchanged at its meeting last month. US yields may also take cues from the comments US Federal Reserve Bank of Atlanta President Raphael Bostic at 2230 IST. The yield on the 10-year US Treasury note was 4.65% at 2000 IST, compared with 4.54% at 1700 IST Wednesday. 

On the domestic front, bond traders will take cues from the RBI's INR 400 billion open market purchase of gilts via auction at 1030-1130 IST. Bond prices are likely to see some gains after the RBI post-market hours announced a 49-day variable rate repo for INR 750 billion to be held on Friday. Traders await any additonal measures by the RBI to ease the liquidity deficit in the banking system.

Market participants will closely assess any statements by US President Donald Trump on tariffs and their potential impact on global trade. Crude oil prices could also be a trigger if they move significantly, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.78% for the day.

India Gilts: Remain in thin band; MFs' demand in short-term gilts likely

MUMBAI--1541 IST--Prices of most government bonds remained in a thin band ahead of the release of CPI data at 1600 IST. Volumes of bonds maturing until April 2026 rose, possibly on demand from mutual funds, dealers said

"Mutual funds have some liquidity now... we have also gotten some inquiries today (Wednesday)," a dealer at a state-owned bank said. "G-sec and state bond yields are more lucrative right now (compared to T-bills) so that's why T-bill bidding also was slightly weaker."

Cut-off yields on the 182-day and 364-day Treasury bills were higher than expected as traders looked to pick up gilts of similar maturities. The 5.63%, 2026 bond matures only two months after the 364-day T-bill, and yields 6.59% against the 6.55% cut-off for the short-term instrument. The median cut-off estimate in an Informist poll was 6.53%. The 2026 bond was the third-most-traded paper in the secondary market Wednesday, likely being sold by foreign investors and bought by domestic mutual funds, dealers said.

Traders said positioning was light ahead of the CPI print. The possibility of another 25-basis-point rate cut in April following the one on Friday hinges on CPI inflation coming below 4.5%, dealers said. Traders had already picked up bonds ahead of the RBI's open market operation auction to buy gilts on Thursday.

Trade volumes are seen picking up after the release of the India CPI data. The market turnover was at INR 173.25 billion, compared with INR 315.10 billion at 1530 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 6.64-6.73%.  (Cassandra Carvalho)

India Gilts: Remain in thin band, volumes fall ahead of India Jan CPI data

MUMBAI--1300 IST--Prices of government bond were in a thin band as traders remained cautious before the release of the India's CPI data, due at 1600 IST, dealers said. Trading volumes were also low as traders awaited inflation print to provide cues to the market on further policy rate cuts.

CPI inflation is likely to have eased to a five-month low of 4.5% in January, from 5.22% in December, according to an Informist poll of 12 economists. Traders expect the print to make a case for another 25-basis-point repo rate at the April policy review, after the Reserve Bank of India's Monetary Policy Committee cut the policy repo rate to 6.25% last week.

"Most players are on sidelines, not much of a surprise is expected from CPI data but a reading above 4.60% can be a negative trigger for the market," a dealer at a private bank said. "But even then there will likely be a wait and watch as there is a big (OMO) auction tomorrow (Thursday)."

Foreign portfolio investors were likely selling gilts before the US CPI data due at 1900 IST Wednesday, dealers said. FPIs had sold nearly INR 21 billion of gilts under the fully accessible route on Tuesday, Clearing Corp. of India data showed.

Market activity in the five bonds the RBI has offered to buy in its INR 400 billion purchase through an open market operation auction Thursday was also muted. The RBI has offered to buy the 7.17%, 2030 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.54%, 2036 gilt and the 7.18%, 2037 gilt. Traders said state-owned banks, which will likely be the major participants at the auction, held these bonds in 'held-to-maturity' portfolio rather than in the trading book. Moreover, the impact of the doubling in OMO size was factored in on Tuesday, when gilt prices rose, dealers said.

Dealers expect the RBI to also double the notified quantum for the next OMO auction Feb. 20 to INR 400 billion, as the central bank's aggressive dollar sales this week may widen the liquidity deficit. The net liquidity injected by the central bank on Monday and Tuesday was near INR 2 trillion. Some traders also anticipate the central bank to include the 10-year benchmark, 6.79%, 2034 gilt in the next OMO auction. With the RBI buying bonds maturing in 10-13 years in its two OMO auctions so far, traders expect gilts in these tenures to perform better due to replacement demand after the auction, dealers said.

Gilts maturing in 30 years or beyond will have to compete with higher state bond supply in the coming weeks for investor appetite, which will likely weigh on the bonds, dealers said. States have borrowed only 65% of the scheduled issuances so far in Jan-Mar, which is likely to increase as it usually does in March. Moreover, the indicated auction amounts are also rising, with all remaining state bond auctions indicated to be above INR 340 billion. While long-term bonds face these pressures, gilts maturing until 15 years will both be helped by the RBI's bond purchases and the Oct-Mar gilt issuance calendar ending on Feb. 28.

The market turnover was at INR 89.70 billion, compared with INR 244.00 billion at 1330 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 6.64-6.73%.  (Vidhushi RajPurohit)

India Gilts: In thin band on caution ahead of India, US CPI data

MUMBAI--0955 IST--Government bond prices moved in a thin range on caution ahead of the release of India's CPI inflation data for January, dealers said. Traders also await the release of US CPI data, due post market hours. 

"Everyone has already built positions on the inflation prints (both India and US) and are just waiting now," a dealer at a private bank said. "Don't think anyone will take fresh positions now...only some on OMO auction tomorrow (Thursday) and mosty on liquid papers."

India's CPI inflation data for January, due at 1600 IST Wednesday may provide cues on the road map for further rate cuts, dealers said. CPI inflation is likely to have eased to a five-month low of 4.5% in January, from 5.22% in December, according to an Informist poll of 12 economists. In light of easing inflation and slowing growth, the Reserve Bank of India's Monetary Policy Committee cut the policy repo rate by 25 basis points to 6.25% last week, the first rate cut in nearly five years.

Dealers expect that the Reserve Bank of India will continue with its prompt measures to ease systemic liquidity and increase the quantum of its open market operation auction next week as well. The RBI on Monday doubled the size of its OMO auction for the purchase of government securities on Thursday to INR 400 billion.

Foreign portfolio investors are likely trimming their holdings of gilts ahead of the January US CPI data at 1900 IST, dealers said. FPIs had sold nearly INR 21 billion of gilts under the fully accessible route on Tuesday, Clearing Corp. of India data showed. The yield on the 10-year US Treasury note rose to 4.56% from 4.53% at 1700 IST on Tuesday, after US Federal Reserve Chair Jerome Powell's comments that the central bank did not need to rush to cut interest rates further.

Trade volumes are seen picking up after the release of the India CPI data. The market turnover was at INR 23.00 billion, compared with INR 107.45 billion at 0930 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 6.64-6.73%.  (Srijita Bose)

India Gilts: Seen steady on caution before Jan CPI inflation data

MUMBAI – Government bond prices may open steady due to caution ahead of India's CPI inflation data for January, dealers said. Trade volumes are seen picking up after the release of the data at 1600 IST. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.64-6.73%, compared to 6.70% on Tuesday. The price of the 10-year bond could move in a narrow range due to caution ahead of the data, dealers said.  

Traders expect India's CPI inflation data for January, due at 1600 IST Wednesday, to provide cues on the road map for further rate cuts. CPI inflation is likely to have eased to a five-month low of 4.5% in January, according to an Informist poll of 12 ecnomists. CPI inflation was 5.22% in December and 5.10% in January 2024. 

Dealers anticipate that the Reserve Bank of India will continue with its prompt measures to ease systemic liquidity. They expect the central bank to increase the quantum of its OMO auctions next week as well. The RBI on Monday doubled the size of its open market operation auction for the purchase of government securities on Thursday to INR 400 billion.

Traders may pick up bonds maturing in seven to 15 years to replace those to be sold at Thursday's auction, they said. Most of the sales are likely to be through the held-to-maturity bucket of banks's investment portfolios.

Meanwhile, US Treasury yields rose slightly to 4.54% at 0830 IST from 4.53% at 1700 IST on Tuesday after comments by US Federal Reserve Chair Jerome Powell, who said the central bank was in no rush to cut interest rates further. Traders await the US CPI data post market hours to guage the trajectory of rate cuts by the Federal Open Market Committee during the year, dealers said. Foreign banks and investors may remain on the sidelines ahead of the data. Gilt prices may also take cues from the movement in the rupee against the dollar during the day, dealers said.  (Srijita Bose)

End

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

Edited by Saji George Titus

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