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Informist, Thursday, Feb. 20, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended lower after the Reserve Bank of India set a lower-than-expected cut-off price on the 10-year benchmark 6.79%, 2034 gilt at the INR-400-billion open market purchase of gilts via auction. Traders had expected the RBI to set a cut-off on the highly-liquid paper above its secondary market value. Prices fell when the result showed a cut-off on a par with the benchmark's market price, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.59, or 6.70% yield, against INR 100.72, or 6.69% yield, Tuesday. The gilts market was shut Wednesday for Shiv Jayanti. Bond prices traded in a thin band before the auction as the open market operation was the only cue for traders who had anticipated getting rid of illiquid stock at a profit, dealers said.

Most state-owned banks said the OMO auction result was along expected lines, as they had bet, correctly, that the largest quantum of bids accepted by the RBI would be for the 7.41%, 2036 gilt and the 7.17%, 2030 gilt. Dealers said Thursday's result was the best for state-owned banks since the RBI began conducting the three scheduled auctions, and they would have dominated the auction, with around 70% of the accepted offers from their portfolios, dealers said.

"We were slightly disappointed that the benchmark was set at market level, and some had bid higher," a dealer at a state-owned bank said. "Rest of it (auction result) is along expected lines since we could offload whatever we wanted, but we still have some more we wanted to (offload)."

OMO auctions have presented an opportunity for state-owned banks to sell illiquid bonds from their 'held-to-maturity' books at a profit, but have left other market participants in the lurch as they have not been able to compete with the deep discounts that large banks are offering to book profit. The RBI's strategy in setting cut-off prices and accepting bids at the OMO auctions remains unpredictable, even after three auctions, but the central bank is largely seen as prioritizing the sale of illiquid bonds at prices cheaper than secondary market value, dealers said. After the first auction on Jan. 30, traders had been of the view that the central bank was looking to cap gilt yields by buying the on-the-run 6.79%, 2034 gilt above its market price.

Banks have been hesitant to refill the space created in their 'held-to-maturity' books after selling nearly INR 1 trillion worth of gilts at the three OMO auctions so far, dealers said. While most banks were looking to buy state bonds at higher yields, traders also did not want to buy illiquid gilts at current levels, after hoarding bonds at yields above 7% earlier.

As for more OMO auctions, price action during the day did not point to any more gilt buys at auction by the RBI. However, some traders expect the RBI to announce around INR 600 billion more OMO auction purchases within Jan-Mar as systemic liquidity conditions undergo a seasonal squeeze in March. Speculation of the RBI buying gilts on-screen has also risen, despite data showing that the central bank did not purchase gilts in the secondary market in the week ended Feb. 7. The 'Others' segment, consisting of the RBI, among other entities, bought gilts worth INR 35.20 billion in the week ended Feb. 14, Clearing Corp. of India data showed, and the purchases have not been stepped up this week.

Dealers were divided on what papers the RBI would offer to buy, in case it did announce more such auctions. Most expect the benchmark 10-year gilt to remain a consistent choice, while the illiquid gilts could change. These gilts are expected to remain in the 7-year to 15-year maturity bucket, making it a good option to stay invested in the belly of the yield curve, dealers said.

"The quantum will be around INR 50 billion henceforth, but the RBI will definitely keep buying the 6.79%, 2034 bond to give the market some liquidity," a dealer at a private bank said. Others said this would create a loop where the benchmark yield is distorted by the RBI's buys, especially with gilt supply for the financial year 2024-25 (Apr-Mar) ending next week.

Demand for short-term gilts is weakening, dealers said, after RBI Governor Sanjay Malhotra said the implementation of the RBI's liquidity coverage norms would be delayed. The draft guidelines had proposed implementation by Apr. 1, and required banks to hold more high-quality liquid assets such as government bonds. The bonds that best matched liability matured in less than seven years, and demand for these bonds has decreased with the implementation now in limbo.

Weakening investor demand in long-term gilts is seen further dragging down auction cut-off prices in the segment. Long-term bonds were sharply down Thursday even before the OMO auction result, as insurance firms and pension funds, alongside banks, were shifting to state bonds to capture higher yields, dealers said.

The RBI's rejection of all bids for the 91-day and 182-day Treasury bills at Thursday's T-bill auction was a positive surprise for bond and money markets, dealers said. This is the first time since Feb. 24, 2016, that the central bank has rejected all bids for 182-day T-bills. The RBI had last rejected all bids for the 91-day T-bills on Mar. 29, 2023.

However, traders saw this as a sign of the market demanding high cut-off yields at the auction rather than a significant signal on the government's comfort on its cash balance. Some traders also prioritised bidding at the OMO auction, which was held at the same time, resulting in reduced competitiveness at the T-bill auction. While traders were cautious ahead of the weekly gilt auction Friday, short-term bond prices may rise and demand for the 6.75%, 2029 gilt may be robust, dealers said.

The government will sell INR 140 billion of the 6.75%, 2029 bond Friday, along with INR 50 billion of the 6.98%, 2054 green bond and INR 150 billion of the 7.34%, 2064 bond. There was no large build-up of short bets before the debt sale, though some were placed by primary dealers in the latter half of trade Thursday, dealers said. Cut-off prices are expected to be below current market levels.

The market turnover was INR 293.30 billion, compared to INR 259.00 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, same as on Tuesday. 

OUTLOOK

On Friday, government bonds are likely to take cues from the movement of US Treasury yields after the release of weekly jobless claims in the US, dealers said. Traders may be cautious ahead of the INR 340-billion gilt auction.

Delayed reactions to the rejection of the 91-day and 182-day T-bills may cause a rise in short-term bond prices, dealers said. Some positivity may persist with the RBI announcing three variable rate repo operations Friday. The RBI will conduct a 45-day variable rate repo auction for a notified amount of INR 750.00 billion between 1200 IST and 1230 IST Friday. The central bank will also conduct a three-day variable rate repo auction worth INR 1.75 trillion as part of its daily auctions, and a 14-day variable rate repo auction worth INR 750.00 billion Friday to ease liquidity in the banking system. Bets on the RBI announcing another tranche of OMO auctions Friday may cause traders to pick up gilts, dealers said.

Traders also await the minutes of the Monetary Policy Committee's February meeting, due Friday, but since the voting pattern was unanimous, there may not be any significant takeaways, dealers said. Traders will pay closer attention to the RBI's weekly statistical supplement for data on whether the RBI bought gilts on-screen in the week ended Friday.

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 6.64-6.74% during the day.

India Gilts: Fall as cut-offs, quantum distribution at OMO buy disappoint

MUMBAI--1620 IST--Government bond prices fell as the Reserve Bank of India set lower-than-expected cut-off prices at the open market operation purchase auction, dealers said. Both the cut-off and quantum accepted of the 10-year benchmark 6.79%, 2034 bond was also lower than traders expected.

The central bank bought only INR 40.91 billion of the 6.79%, 2034 gilt, which was only 12% of the total quantum accepted at the auction, and set the cut-off price at INR 100.72, against INR 100.80 median in an Informist poll. Instead, dealers said the lower cut-offs across the six bonds at auction were due to state-owned banks selling stocks from their held-to-maturity portfolios at prices lower than the market. Since many of these bonds were issued during a rate hike cycle, the banks were still making sizeable profits, dealers said.

"Banks are okay with selling stock from their held-to-maturity portfolio because they need the liquidity, and RBI is of course accepting it as well," a dealer at a private bank said. "The proceeds are going to credit and with liquidity expected to tighten further now, the desperation is showing."

Meanwhile, the RBI rejected all bids on 91-day and 182-day Treasury bills at the auction. This was the first time in nine years that the central bank rejected bids at the 182-day T-bill auction and nearly two years since it last rejected all bids at the 91-day auction. With liquidity deficit expected to widen to over INR 3 trillion as outflows for goods and services tax and advance tax payments pick up, traders bid for higher yields than current market levels, which likely led the RBI to reject bids at the T-bill auction, dealers said. Mutual funds also likely refrained from bidding aggressively at the auction, they said.

The market turnover was INR 222.50 billion, compared with INR 205.20 billion at 1630 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 6.65-6.73%.  (Srijita Bose)

India Gilts: In thin band before OMO auction result; views mixed on cut-offs

MUMBAI--1307 IST--Prices of government bonds were in a thin band as traders awaited the result of the Reserve Bank of India's INR 400-billion bond purchase auction. Traders were looking to sell the 6.79%, 2034 bond at a premium to its current market price, while state-owned banks may offer bonds from their held-to-maturity portfolios aggressively and drive down cut-offs, dealers said.

The RBI will buy six bonds – the 7.17%, 2030 gilt; 7.18%, 2033 gilt; 7.10%, 2034 gilt; 6.79%, 2034 gilt; 7.41%, 2036 gilt; and the 7.18%, 2037 gilt – at the auction. Based on the prior two open market auctions, dealers had mixed views on the RBI's preference. On Jan. 30, the RBI bought INR 50 billion of the 6.79%, 2034 bond at a premium to its market price, a quarter of the total notified amount. Last week, it prioritised off-the-run gilts, buying them at deep discounts to the secondary market levels, largely from state-owned banks, dealers said.

Traders at private banks are hoping for higher cut-off prices and quantum on the liquid papers while balance sheet managers, particularly from state-owned banks, are expecting larger quantum for the illiquid bonds. The cut-off price on the 6.79%, 2034 bond is seen up to 9 paise above its market price. As for the other papers being offered, their cut-off prices are 10-20 paise below those indicated by Financial Benchmarks India Pvt. Ltd. on Tuesday. The 7.17%, 2030 bond and the 7.41%, 2036 paper are seen as being accepted in larger quantum than the rest, as banks had ample stock of these papers.

"...(Banks) are deep in the money in the 2030 and 2036 papers, so people will try to tender as much as possible," a trader at a primary dealership said. "Apart from the ones who have already booked their profit, others will try to undercut as much as possible."  

As for the secondary market, volumes remained thin as traders awaited the OMO auction result. Demand from banks and insurance companies saw active trade in the illiquid 8.30%, 2040 bond, as its yield offered higher returns than that of the 15-year benchmark 6.92%, 2039 paper. Traders also began positioning ahead of the INR 340-billion weekly bond sale Friday. Trade in short-term bonds picked up as the RBI will auction INR 140 billion of the 6.75%, 2029 bond, along with INR 50 billion of the 6.98%, 2054 green bond and INR 150 billion of the 7.34%, 2064 bond.

The market turnover was INR 74 billion, compared with INR 43.55 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 6.65-6.73%.  (Cassandra Carvalho)

India Gilts: Steady before INR 400 bln RBI OMO buy auction

MUMBAI--0954 IST--Government bond prices were in thin band ahead of the Reserve Bank of India's open market operation purchase auction worth INR 400 billion at 1030-1130 IST, dealers said. Traders will take cues from the result of the auction later in the day, they said. 

"There are both investor papers and trading paper (the 10-year benchmark 6.79%, 2034 gilt), and depending on how much of each of these papers the RBI will be buying and the cut-offs on that, the market will take cues," a dealer at a private bank said. "There are no other cues right now...some movement in the belly (of the yield curve) can be there but PSUs' (state-owned banks') replacement demand is not coming so overall market should be range-bound only."

The RBI will buy six bonds – the 7.17%, 2030 gilt; 7.18%, 2033 gilt; 7.10%, 2034 gilt; 6.79%, 2034 gilt; 7.41%, 2036 gilt; and the 7.18%, 2037 gilt – at the auction. For the 10-year benchmark bond, traders are expecting a higher cut-off price, nearly 10 paise above market levels as the central bank had set a cut-off price above the secondary market price when it last bought the bond on Jan. 30.

The market turnover was INR 27.10 billion, compared with INR 7.70 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 6.65-6.73%.  (Srijita Bose)

India Gilts: Seen opening steady before RBI OMO buy auction

MUMBAI – Government bonds are seen opening steady ahead of the open market operation purchase auction worth INR 400 billion by the Reserve Bank of India at 1030-1130 IST, dealers said. Traders will take cues from the result of the auction in the second half of the day. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.73%, compared to 6.69% on Tuesday. Money markets were closed on Wednesday for Chhatrapati Shivaji Maharaj Jayanti.

The RBI will buy six bonds – the 7.17%, 2030 gilt; 7.18%, 2033 gilt; 7.10%, 2034 gilt; 6.79%, 2034 gilt; 7.41%, 2036 gilt; and the 7.18%, 2037 gilt – at the auction. Traders are hoping to sell the 10-year benchmark 6.79%, 2034 bond to the RBI at a profit, because the central bank had set a cut-off price above the secondary market price when it last bought the bond on Jan. 30, dealers said. The 10-year benchmark gilt was not offered to be bought at the INR 400-billion auction last week.
 

Meanwhile, US Treasury yields remained largely unchanged from Tuesday with the 10-year note at 4.52% at 0830 IST after the minutes of Federal Open Market Committee's January meeting released Wednesday suggested that Federal Reserve officials may be ready to hold rates steady until inflation in the US eases. Traders also remained cautious over US President Donald Trump's tariff plans, after he announced on Tuesday that he would impose about 25% tariffs on imports of  pharmaceuticals, autos, and semiconductor chips to the US.  (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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