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Informist, Thursday, Feb. 13, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended lower after the cut-off prices at the Reserve Bank of India's purchase of gilts at the open market operations auction Thursday were sharply lower than expected, dealers said. Before the auction result, prices moved in a thin band and trade volumes were dull.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.55, or 6.71% yield, against INR 100.61, or 6.70% yield, Wednesday.

The RBI bought its entire notified amount of INR 400 billion worth of gilts and accepted all five paper it had offered to buy. However, cut-off prices were 12-20 paise lower than median estimates in an Informist poll.

Taking the result of last month's open market operations auction as a precedent, dealers were expecting the liquid 7.10%, 2034 paper to have the highest quantum of sale, with a comparatively higher cut-off. However, the 7.54%, 2036 gilt was accepted in the largest quantum, at INR 100 billion, while the central bank only bought INR 41.05 billion worth of the 2034 bond.

At the auction held Jan. 30, the cut-off on the 10-year benchmark 6.79%, 2034 gilt was higher than the bond's market price. However, dealers said Thursday's auction was a means of offloading illiquid paper from banks' held-to-maturity books, while simultaneously allowing the RBI to buy bonds at cheaper prices. All the bonds at the auction were heavily "in the money", and banks took advantage to book profit on stock whose sale is typically restricted outside of OMO auction.

"Last auction (on Jan. 30) we thought RBI was looking at yield management but clearly today (Thursday) was just a way for PSUs (state-owned banks) to dump stock and RBI could inject liquidity and get it cheaper," a dealer at a private bank said.

Despite the lower-than-view cut-offs, banks were satisfied that the auction was fully subscribed, especially after the RBI doubled its size Monday. They were also optimistic about future OMO auctions by the RBI as its persistent dollar sales to keep the rupee from depreciating sharply against the dollar continued to drain rupee liquidity, dealers said.

Traders are also betting on the RBI doubling the size of its scheduled OMO auction of INR 200 billion next week, dealers said. The release is expected after market hours Friday. The bond buys were among several positive cues on the domestic side, including lower-than-expected CPI for January, dealers said. India's CPI for January, released Wednesday, was 4.31%. An Informist poll had estimated the CPI at 4.50%.

With concerns over inflation ebbing, dealers said the expectations of a repo rate cut in April are widespread. However, they are awaiting India's GDP data for Oct-Dec and the second advance estimate for the financial year 2024-25 (Apr-Mar), due Feb. 28, to confirm their rate view. The growth in Jul-Sept had brought forward rate-cut hopes, and possibly convinced the RBI's Monetary Policy Committee to cut the repo rate by 25 basis points to 6.25% last week, dealers said.

Replacement demand from banks after the RBI's purchases is yet to be seen, and they are on the sidelines hunting for bargains in off-the-run securities, waiting for state bond spreads over gilts to rise, dealers said. State bond auction sizes are scheduled to rise in the remainder of the March quarter, and investors want to park high-yielding spread instruments into their 'held-to-maturity' portfolios. The RBI has bought nearly INR 1 trillion worth of gilts since January through open market purchases on-screen and via auction.

Offshore pressures and consistent sales by foreign portfolio investors have also kept bond prices from rising, particularly given the uncertainty on US trade and tariff policies under President Donald Trump. The 10-year US Treasury yield also rose to 4.61% at 1700 IST Thursday from 4.55% Wednesday after the US CPI came in higher than expected, at 0.5% on month.

"US yields are also not giving us that comfort to start buying," a dealer at a state-owned bank said. "On Monday, US markets are shut, so maybe then we could see some purchases."

Some dealers preferred gilts maturing within the next two years over money market instruments such as Treasury bills, as short-tenure papers offered higher yields. The 8.20%, 2025 bond maturing in September was the third-most-traded paper on the secondary market, as it yielded 6.61%, against the cut-off yield of 6.57% on the 182-day T-bill at auction Wednesday.

The market turnover Thursday was INR 308.85 billion, against INR 283.85 billion Wednesday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There were no trades using the wholesale digital rupee pilot Thursday, same as on Wednesday.

OUTLOOK

On Friday, gilt prices are likely to take cues from the overnight movement of US Treasury yields after the US January Producer Price Index and jobless claims for the week ended Saturday. Producer prices rose 0.4% on month in January, against the consensus estimate of 0.3%. US jobless claims fell by 7,000 to 213,000 in the week ended Saturday, against the consensus estimate of 215,000.

On the domestic front, bond traders will take cues from the INR 390 billion weekly gilt auction at 1030-1130 IST. The government will sell INR 70 billion of the 6.64%, 2027 bond, INR 220 billion of the 6.79%, 2034 bond, and INR 100 billion of the 7.09%, 2074 bond. This will be the benchmark 10-year gilt's last scheduled auction for FY25, and traders placed short bets on the gilt this week to pick up auction stock.

Traders now await any additional measures by the RBI to ease the liquidity deficit in the banking system. Market participants will closely assess statements by President Trump on tariffs and their potential impact on global trade, especially at his meeting with Prime Minister Narendra Modi. The two leaders are scheduled to address a press conference at 0330 IST Friday.

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 6.67-6.75% for the day.

India Gilts: Fall as RBI sets lower-than-expected cut-off prices at OMO buy

MUMBAI--1623 IST--Prices of government bonds fell after the results of the auction by the Reserve Bank of India for open market purchase of gilts, dealers said. Across the five papers, cut-off prices were 12-20 paise lower than median estimates in an Informist poll.

Balance sheet managers from banks aggressively sold gilts despite the large auction, worth INR 400 billion, which the RBI had doubled from the initially notified amount. At the auction, the RBI bought INR 100 billion of the 7.54%, 2036 bond and nearly the same amount of the 7.18%, 2037 gilt. Traders had expected the 7.10%, 2034 bond – the most liquid paper among the five on offer – to be one with the largest accepted offering, similar to the RBI picking up a quarter of its INR 200 billion buy through the 6.79%, 2034 bond at the previous OMO purchase auction on Jan. 30. RBI bought just INR 41.05 billion of the 7.10%, 2034 bond at the auction.

"This time most of the securities were HTM (held-to-maturity) securities... which is why cut-offs were weak," a dealer at a private bank said. "Banks have low deposits so people want to get rid of stock from held-to-maturity and use that in lending."

Volumes had remained dull awaiting the auction results and nearly doubled since the RBI announced the cut-offs. Foreign banks continued to sell short-term gilts, while life insurers likely entering bond forward-rate agreements with banks saw a minor rise in long-term bond prices, dealers said. The 7.09%, 2054 bond opened 5 paise higher from Wednesday's close, likely due to bond forward-rate agreements written on Wednesday.

Some traders sold the benchmark 6.79%, 2034 gilt ahead of the bond's last scheduled auction this financial year. On Friday, the government will sell INR 220 billion of the gilt. The government will also sell INR 70 billion of the 6.64%, 2027 bond and INR 100 billion of the 7.09%, 2074 bond.

The market turnover was INR 227.85 billion at 1530 IST, compared with INR 214.80 billion at the same time on Wednesday, 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 6.66-6.72%.  (Aaryan Khanna and Cassandra Carvalho)

India Gilts: In thin band; bks' offers likely aggressive at OMO buy auction

MUMBAI--1210 IST--Government bond prices continued to trade in a thin band. The size of the Reserve Bank of India's scheduled purchase of five government securities worth INR 400 billion at the open market operation auction is likely to keep cut-off prices lower than their last valuations, dealers said.

The auction is likely to be fully subscribed, and offers will be competitive across all five securities that the RBI has offered to buy as the bonds have large outstandings and are widely owned, dealers said. Moroever, banks have the rare opportunity to sell from the held-to-maturity segment of their gilt portfolios, giving them an exit at a sizeable profit, they said. Banks can sell bonds to the RBI and the government at an auction over and above the 5% limit for shifting bonds out of the held-to-maturity portfolio, in which bonds are not allowed to be sold.

"After the auction, there may some buying (in the secondary market) if the RBI buys at the levels that the market expects," a dealer at primary dealership said. "Because of the size, I think most of the bids will be lower than FBIL (Financial Benchmark India Ltd.) levels (on Wednesday)."

However, dealers said that while the RBI's continued bond buys are propping up prices, the case for adding more bonds maturing in 10-15 years to trading books is limited. Foreign portfolio investors have been selling short-term gilts over the past few days, and were likely trimming their holdings of longer-term Indian bonds after the 10-year US Treasury yield surged to a two-week high on Wednesday, dealers said.

The impact of domestic positives, such as receding inflation in January and further open market gilt purchases, were already factored into gilt prices and kept domestic investors interested in picking up bonds. A repo rate cut in April, which is widely expected, will only translate to bringing gilt yields down once there is an influx of liquidity, dealers said. Liquidity conditions are seen tight until March-end due to the seasonal factors and the RBI's continued dollar sales. Its liquidity operations announced so far will only keep money market rates anchored, but would not allow banks to invest heavily in instruments such as gilts, particularly on longer tenures, dealers said.

"All the positives in the market have been priced in, and so now market is looking more at the risks," a dealer at a private bank said. "It makes sense to cut duration when US yields are going up, and start buying 3-5 year papers for asset-liability management instead of taking a trading risk."

Trade volumes were muted, and will likely remain so until the auction result after 1400 IST, dealers said. Traders looked to both domestic and global cues for direction on gilt prices, which have been stuck in a narrow band this week after the Monetary Policy Committee delivered a widely expected rate cut Friday.

The market turnover was INR 65.50 billion, compared with INR 83.70 billion at 1230 IST Wednesday, 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 6.66-6.72%.  (Aaryan Khanna)

India Gilts: Steady before RBI's buy at OMO auction; rise in US ylds weighs

MUMBAI--1010 IST--Government bond prices were steady as traders await the Reserve Bank of India's scheduled INR 400-billion gilt purchase at the open market operation auction at 1030-1130 IST. An overnight rise in US Treasury yields following higher-than-expected US CPI inflation weighed on prices, offsetting domestic positives, dealers said

The yield on the 10-year US Treasury note rose to 4.61% from 4.55% at the end of Indian market hours Wednesday. The US CPI data released at 1900 IST Wednesday showed US consumer prices increased the most in over one year in January. Headline CPI inflation rose to 0.5% on month, against the 0.3% expected.

On the other hand, India's headline CPI inflation fell to a five-month low of 4.31% in January, according to data released on Wednesday. The lower-than-expected inflation reading – an Informist poll had a median of 4.5% inflation – reaffirmed hopes that the RBI's Monetary Policy Committee will cut the repo rate by 25 basis points again in April to 6.00%.

"There is rise in US yields after the US inflation rose, but then for us the CPI for January was a positive. As the two point in opposite direction, our market is kind of stuck in the middle for now," a dealer at a private bank said. "Further movement will only be there once we see the release of the OMO results."

Traders expect participation from accross market segments at the RBI's gilt buy, as the papers it offered to buy were relatively liquid papers, dealers said. 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. The auction is expected to be fully subscribed as most of the banks have stocked up these papers ahead of the auction, dealers said.  

Another positive was that the RBI announced Wednesday it would conduct a 49-day variable rate repo auction on Friday. The doubling of the OMO auction size and the notice of long-tenure and daily repo auctions are seen by traders as RBI's procative moves to ease money market rates, with systemic liquidity in deficit since mid-December. However, the RBI is currently seen only neutralising its liquidity drain through dollar sales to support the rupee, instead of ensuring systemic liquidity being neutral or surplus, dealers said. 

The market turnover was at INR 39.75 billion, compared with INR 30.65 billion at 1030 IST Wednesday, 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 6.66-6.73%.  (Vidhushi RajPurohit)

India Gilts: Seen lower as US ylds rise; RBI's OMO buy auction to limit fall 

MUMBAI – Government bond prices may open lower tracking a rise in US Treasury yields after the higher-than-expected US CPI print for January, dealers said. The fall in prices could, however, be limited on caution before the purchase of gilts worth INR 400 billion by the Reserve Bank of India through an open market operation auction, they said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.64-6.73%, compared to 6.70% on Wednesday.

The yield on the 10-year US Treasury note rose to 4.61% at 0830 IST from 4.55% at 1700 IST. The US consumer price index rose 0.5% on month in January, against a Dow Jones estimate of 0.3% rise. The reading, the highest since August 2023, pushed up US yields as expectations of the US Federal Open Market Committee cutting rates in the first half of this year waned. The FOMC left rates unchanged at its meeting last month.

Following the data on Wednesday, Federal Reserve Chair Jerome Powell appeared before the House Committee on Financial Services, and said January's hotter-than-expected CPI data is a reminder that the Fed has made "great progress" towards bringing inflation closer to its 2% target but that it is "not quite there yet." "So we want to keep policy restrictive for now," he said.

Traders said rate cuts may be further delayed in the US as the January CPI print shows that US inflation is already high even before any tariffs imposition or tax cuts executed by the Donald Trump administration, which is seen pushing up inflation further.

Foreign portfolio investors will turn sellers due to the rise in US yields, dealers said. A rise in US yields narrows the interest rate differential between safe-haven assets and emerging market debt, making the latter less appealing to foreign investors. FPIs have already sold more than INR 36 billion so far in the week. 

Meanwhile, on the domestic front, the RBI's OMO auction scheduled at 1030-1130 IST may limit the fall in prices. The RBI will buy five bonds – the 7.17%, 2030 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.54%, 2036 gilt, and the 7.18%, 2037 gilt – at the auction. The fall could also be limited following the RBI's announcement post-market hours of a 49-day variable rate repo for INR 750 billion to be held on Friday. 

Traders expect 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. The movement of rupee during the day will also lend cues to bond prices, dealers said.  (Srijita Bose)

End

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

Edited by Rajeev Pai

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