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Informist, Monday, Feb. 17, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended higher on Monday after the Reserve Bank of India doubled the size of its upcoming open market operation purchase through auction, dealers said. Volumes were low as traders awaited further cues on the RBI's strategy to manage liquidity in the banking system, which has been under strain because of the central bank's foreign exchange operations.

As the RBI stepped up its dollar sales to prop up the rupee last week, it also had to double down on its bond purchases to replenish the liquidity getting drained from the banking system. It will now buy up to INR 400 billion worth of bonds on Thursday, doubling the amount of its open market purchase for the second consecutive week.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.67, or 6.69% yield, against INR 100.57, or 6.71% yield, Friday. Bond prices had opened higher, aided by a fall in US Treasury yields, but remained anchored as traders waited for fresh cues in a truncated trading week. Money markets are shut on Wednesday for Chhatrapati Shivaji Maharaj Jayanti. Some traders were on leave until the trading holiday, which also kept volumes low, dealers said. The market turnover was INR 235.20 billion, against INR 281.15 billion Friday, according to data on the RBI's Negotiated Dealing System–Order Matching platform.

"Traders are just playing on OMO (auction) right now, (by) trading those papers or buying similar off-the-run papers," a dealer at a state-owned bank said.

Traders preferred off-the-run papers due to higher yields than liquid papers, encouraged by the RBI's offer to buy such papers which banks typically hold in their 'held-to-maturity' books.

Trade volume for high-yielding, illiquid papers such as the 8.17%, 2044 gilt rose as banks bought these to restock their held-to-maturity books which have become considerably lighter due to the RBI's recent open market purchases. 

However, traders were not aggressive in their purchases as they awaited more announcements from the RBI to ease the liquidity deficit in the banking system. Traders had already stocked up on bonds on expectations of a rate cut, and had no urgency to pick up gilts after the RBI's Monetary Policy Committee cut rates on Feb. 7. On Friday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit--was INR 2.14 trillion, remaining in deficit since mid-December. Traders expect more open market purchases, dollar-rupee buy-sell swaps and variable rate repo auctions.

The RBI did not buy any gilts through screen-based open market operations in the week ended Feb. 7. This was the first time it has not bought gilts in the secondary market since the week ended Jan. 10. During the three weeks in between, the RBI bought INR 388.15 billion through screen-based purchases. However, bond traders did not see this as a negative cue for bonds since they preferred OMO auctions due to the opportunity to bid competitively, along with the option of various tenures, dealers said.

The rise in price of the long-term 7.34%, 2064 bond was larger than most tenures due to demand from long-term investors such as insurance companies and provident funds, dealers said. The bond will be auctioned for the last time this financial year on Friday, and some dealers expect a new 40-year paper to be issued in 2025-26 (Apr-Mar). Writing of forward-rate agreements also likely spurred demand for the paper, with dealers speculating that a large state-owned insurer was involved in the agreement.  

State-owned banks likely sold bonds at a profit, which capped rise in bond prices. Private banks and foreign banks were on the buying side as the 10-year US Treasury yield also fell to 4.48%, nearly 6 bps lower from close of Indian market on Friday, after US retail sales data fell short of estimates. US markets were shut on Monday for Presidents' Day.

Demand for gilts by foreign portfolio investors was muted as they are waiting for more certainty on impending reciprocal tariffs by US President Donald Trump's administration, dealers said. FPIs net sold gilts worth INR 5.49 billion Monday through the fully accessible route, according to data from Clearing Corp. of India at 1750 IST. However, while FPIs were sellers on a net basis, dealers said FPIs picked up short-term bonds, especially those that offered higher yields. 

"FPIs are buying short-term today (Monday), I know they bought the 7.38%, 2027 paper but on a net number they may be sellers," a dealer at a private bank said. 

Some traders also picked up bonds in light volumes on expectations of another 25 bps rate cut by the Monetary Policy Committee in April. India's merchandise trade data, which showed a widening of the trade deficit, was largely along expected lines. However, some traders saw it as a positive cue for bonds as it made a case for continued intervention by the RBI in the foreign exchange market, which in turn would necessitate more infusion of liquidity through open market gilt purchases, dealers said. There were no trades using the wholesale digital rupee pilot, same as on Friday.

OUTLOOK

On Tuesday, government bonds are likely to take cues from the movement of US Treasury yields in Asian trade, dealers said.

Traders are waiting for the minutes of the US Federal Open Market Committee's meeting that was held in January and the minutes of the Monetary Policy Committee's meeting held earlier this month. Minutes of both are due this week. Market participants will closely assess any statements by President Trump on tariffs and their potential impact on global trade.

Traders are waiting for any additional measures by the RBI to ease the liquidity deficit in the banking system. 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 6.65-6.72% during the day.

India Gilts: Remain up; volumes muted as traders await cues on liquidity

MUMBAI--1548 IST--Prices of government bonds remained up but volumes were muted as traders awaited cues more measures on liquidity from the Reserve Bank of India, dealers said. 

The market turnover was INR 181.15 billion, compared with INR 204.55 billion at 1530 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform.

The rise in bond prices was limited as traders booked intraday profits on the benchmark 10-year gilt after bond prices rose earlier in the day on the back of the RBI's doubled open market auction size for Thursday.

"Everyone was front-running before the rate cut and bought whatever they needed so now until there's a strong cue it's just wait-and-watch," a dealer at a state-owned bank said. The RBI's Monetary Policy Committee cut the repo rate by 25 basis points on Feb. 7.

The 7.34%, 2064 bond price rose, and volumes in the paper were the third largest on the secondary market. This was likely due to purchases ahead of the weekly bond sale on Friday. The 2064 paper will likely be auctioned for the last time this financial year, and some dealers expect a new 40-year paper in 2025-26 (Apr-Mar).

Replacement demand from traders to fill in their 'held-to-maturity' books was gaining momemtum in light volumes. Banks sold most papers at the past two OMO auctions from their 'held-to-maturity' books and were using those inflows for lending, instead of refilling their books, dealers said. Off-the-run papers such as the 8.17%, 2044 gilt saw a rise in volume due to likely bilateral trades, dealers said.

During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.73%. (Cassandra Carvalho)

India Gilts: Remain up as RBI hikes OMO buy size; profit booking limit gains

MUMBAI--1325 IST--Government bond prices remained up as the Reserve Bank of India Friday said it would buy twice the previously notified amount of gilts at Thursday's open market operation auction. Meanwhile, state-owned banks sold bonds at a profit, thereby limiting gains, dealers said.

Banks also picked up off-the-run gilts maturing in 15 years as well as state bonds with similar maturities for their held-to-maturity portfolios to replace the bonds sold at the Thursday's OMO auction, dealers said. Demand for these papers may increase further as traders will look to replace the bonds after this week's OMO auction, they said.

"The old benchmark and illiquid papers are being traded now for banks' HTM books... these yields are still better to carry full term as well as state bonds are giving higher yields, so people are going for that," a dealer at a primary dealership said. "OIS has already started pricing in the April rate cut (by the RBI's Monetary Policy Committee)...so short-term gilts will still have space of 2-3 basis points to steepen further."

Traders stepped up purchases of gilts maturing in three to seven years to bet on a 25-bps rate cut at the next policy review meeting by the MPC in April, dealers said. With the increase in the upcoming OMO auction size, traders said the RBI seemed proactive in infusing durable liquidity into the banking system, which suggests that it could provide monetary accommodation also through another rate cut in April.

Private banks and foreign banks likely remained on the buying side as the 10-year US Treasury yield also fell to 4.48%, nearly 6 bps lower from close of Indian market on Friday. However, the demand for gilts by foreign portfolio investors was muted as they are waiting for more certainty on impending reciprocal tariffs by US President Donald Trump's administration, dealers said.

The market turnover was INR 134.65 billion, compared with INR 124.35 billion at 1330 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.73%. (Srijita Bose)

India Gilts: Rise after RBI doubles size of OMO buy auction Thu

MUMBAI--0952 IST--Government bond prices rose Monday after the Reserve Bank of India Friday said it would buy twice the previously notified amount of gilts at Thursday's open market operation auction, dealers said. The central bank will now buy bonds worth INR 400 billion on Thursday.

A fall in US Treasury yields also aided prices at opening Monday. The yield on the 10-year benchmark US Treasury note fell to 4.48% from 4.54% at 1700 IST Friday after US retail sale data fell short of estimates. 

"People are expecting more on liquidity right now and with the OMO and US yields, rate cut expectations in April (by the RBI's Monetary Policy Committee) are also rising," a dealer at a state-owned bank said. "But I don't think it will go up much from here because profit-booking is there."

Private banks are likely to have bought gilts, while state-owned banks were likely to have been on the selling side, dealers said. Traders will look to pick up bonds maturing in 15 years as they will try and replace the bonds to be sold at the OMO auction later this week, dealers said. Some gains were also offset due to the RBI's lack of on-screen bond purchases in the week ended Feb. 7. This was the first time it did not buy any gilts in the secondary market since the week ended Jan. 10. In the three weeks in between, the RBI bought INR 388.15 billion worth of gilts through screen-based purchases.

The market turnover was at INR 67.50 billion, compared with INR 21.00 billion at 0930 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 6.65-6.73%.  (Srijita Bose)

India Gilts: Seen up as RBI doubles OMO buy auction size again, US ylds fall

MUMBAI – Government bond prices are seen higher after the Reserve Bank of India doubled the size of its open market operation auction for the purchase of government securities on Thursday to INR 400 billion, dealers said. The fall in US Treasury yields is also seen supporting prices, they said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.73%, compared to 6.71% on Friday. With the increase in the upcoming auction size, the RBI is expected to remain proactive in infusing durable liquidity into the banking system.

This is the second time that the central bank has increased the size of the OMO auction due to tight liquidity conditions in the banking system. RBI had increased the auction size at last week's OMO purchase. Traders during the day will pick up bonds maturing within 15 year as they will look to replace the bonds to be sold at the OMO auction on Thursday, dealers said. At the auction, the RBI said it will buy five bonds – 7.17%, 2030 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, the 10-year 6.79%, 2034 gilt, 7.41%, 2036 gilt, and the 7.18%, 2037 gilt.

Some gains during the day could be offset by RBI's lack of on-screen bond purchases in the week ended Feb. 7. This was the first time it has not bought gilts in the secondary market since the week ended Jan. 10. During the three weeks in between, the RBI bought INR 388.15 billion through screen-based purchases.

The yield on the 10-year benchmark US Treasury note fell to 4.48% at 0820 IST from 4.54% at 1700 IST Friday after US retail sale data fell short of estimates. US markets are shut on Monday for Presidents' Day. However, some foreign portfolio investors may pick up bonds as a fall in US yields widens the interest rate differential between safe-haven assets and emerging market debt, making the latter more appealing to them. (Srijita Bose)

End

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

Edited by Ashish Shirke

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