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Informist, Tuesday, Feb. 25, 2025

By Srijita Bose

MUMBAI – Government bond prices ended marginally in the red after erasing mild gains notched up earlier in the day as the rupee's sharp fall against the US dollar weighed on sentiment, dealers said.

A sharp depreciation of the domestic currency threatens to spur foreign investment outflows from the country's debt market, and could deter the central bank from loosening its monetary policy. The rupee weakened 0.6% to close at 87.2100 per dollar on Tuesday from its previous close of 86.6950 per dollar as banks persistently bought dollars on behalf of importers and foreign portfolio investors.

Bond prices mostly stuck to a narrow band during the day as traders were reluctant to place major bets ahead of the Mahashivratri holiday on Wednesday and before the GDP data release for Oct-Dec on Friday, dealers said. Prices rose early in the day tracking an overnight fall in US Treasury yields. The yield on the 10-year US Treasury note fell to 4.33% from 4.44% at 1700 IST on Monday, leading domestic banks to pick up gilts in early trade, dealers said. However, foreign portfolio investors remained on the sidelines as they awaited more clarity on impact of tariffs and trade policies by US President Donald Trump, they said. 

The 6.79%, 2034 bond ended at INR 100.58, or 6.71% yield, on Monday against INR 100.60, or 6.70% yield, on Monday. The movement on the 10-year benchmark during the day was limited as traders already have sufficient stock with them and refrained from increasing their exposure before the release of the GDP data. Last week, the Reserve Bank of India at its open market operation purchase auction had accepted a quantum for the 10-year benchmark 6.79%, 2034 bond that was lower than traders' expectations, dealers said.

"Market is in a wait-and-watch mode before the GDP data, but rate cut expectations (by the RBI's Monetary Policy Committee) have seen a reaction in shorter-tenure papers," a dealer at a private bank said. "Towards the end, the fall was also because of rupee falling and SDL (state bond auction) cut-offs." 

Mutual funds and banks continued to pick up bonds maturing within 10 years on increased expectations of a rate cut by the RBI's Monetary Policy Committee in April, as they did on Monday. Expectations of a rate cut have strengthened after minutes of the rate-setting committee's Feb. 5-7 meeting, released Friday, showed its increased tilt towards supporting growth. State-owned banks likely sold illiquid gilts of up to 10-year maturities from their held-to-maturity portfolios after the RBI skipped announcing on open market purchase of gilts this week, dealers said. Trade volumes on Treasury bills in the secondary market also rose due to lower supply during the rest of the current financial year as well as in 2025-26 (Apr-Mar), they said.

Some traders still expect the RBI to announce more open market auctions to infuse liquidity into the banking system. Last week, the cental bank announced a $10 billion dollar/rupee buy/sell swap auction for Friday. However, most dealers viewed this to roll-over its foreign exchange forward book as they expected more durable liquidity infusions from the central bank. 

"There is still expectation that the RBI might come with an OMO (open market operation) or something, we are expecting about INR 600 billion-INR 800 billion worth of OMO auction by March," a dealer at another private bank said. "Even now, liquidity is manageable even after the month's outflows as daily VRRs (variable rate repo auctions) are providing some support." On Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit—was at INR 1.93 trillion.

Meanwhile, volumes on longer tenure gilts on the secondary market remained dull as traders waited for spread in yield between the 10-year benchmark and longer tenure bonds to widen as demand from insurers and other institutional investors remained modest, dealers said. Higher supply of states' bonds and greater issuances of corporate bonds have also curbed the appetite for government bonds among institutional investors, they said.

Demand at the INR 410.54 billion state bond auction was mixed, with the cut-off yield on 10-year paper slightly higher than traders' expectations. The cut-off for 10-year bonds was in the range of 7.17-7.20%, against the estimated cut-off of 7.15-7.16% as per an Informist poll of nine market participants. This dragged down prices near the end of trade as investors who had picked up a chunk of the supply at the auction sold gilts in the seocndary market, dealers said. 

The marketwide turnover rose to INR 382.15 billion, compared to INR 279.70 billion Monday, according to data on the RBI's Negotiated Dealing System–Order Matching platform. There was no trades made using the wholesale digital rupee pilot, against two trades worth INR 100 million on Monday.

OUTLOOK

Money markets are shut Wednesday due to Mahashivratri. On Thursday, government bonds are likely to take cues from the overnight movement of US Treasury yields. Prices may remain in a narrow range till Friday as traders will wait for GDP data on Friday for cues, dealers said.

Traders will also remain cautious awaiting cues on further bond purchases by the RBI, dealers said. Any measures on further liquidity infusion by the central bank will also be a positive for shorter-tenure bonds, they said.

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 6.68-6.75% during the day.

India Gilts: In thin band; fall in rupee wipes out gains

MUMBAI--1615 IST--Prices of government bonds were stuck in a thin band in the absence of fresh cues, with traders reluctant to place major bets ahead of the trading holiday Wednesday when the domestic markets will be shut for Mahashivratri. Bonds erased the modest gains notched up earlier in the day after the rupee weakened past 87 a dollar, dealers said. The domestic currency ended at 87.2100 a dollar, from 86.6950 per dollar Monday.

"Prices are in a tight range as the (states bond) auction was of a big quantum and traders were waiting to see what the result points to, and mostly there was not much surprise there, so market did not move much," a dealer at a state-owned bank said. "The easing in US yields is mostly factored in, so now there is not much movement for that."

Demand at the state bonds auction was mixed, with the cut-off yield on 10-year paper slightly higher than traders' expectations. The cut-off for 10-year bonds was in the range of 7.17-7.20%, against the estimated cut-off of 7.15-7.16% from an Informist poll of nine market participants.

Trade volumes picked up slightly as traders cited demand from mutual funds and state-owned banks for short-tenure paper maturing within 10 years. Some traders expect the Reserve Bank of India to announce more open market operation auctions to purchase gilts to infuse liquidity in the banking system. Last week it announced a $10 billion dollar/rupee buy/sell swap auction for Friday. The marketwide turnover was INR 323.75 billion, compared with INR 220.60 billion at 1630 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform.

Meanwhile, demand for long-term bonds waned due to reduced apetite from insurance firms and other institutional investors, dealers said. Trades worth only INR 2.70 billion were reported for the 7.09%, 2054 bond on the Clearing Corp. of India's site.

"The insurance premiums have fallen, leading to a crunch for funds there, and thus we are seeing the long-term bonds out of favour right now," a dealer at another state-owned bank said. Life insurance companies' first-year premium income fell 8.1% on year to INR 308.25 billion in January, data released by the Life Insurance Council showed.

During the day, the yield on the 6.79%, 2034 bond is seen at 6.60-6.75%.  (Vidhushi RajPurohit)

India Gilts: Remain up due to fall in US ylds; volumes muted on lack of cues

MUMBAI—1340 IST--Prices of government bonds remained higher owing to an overnight fall in US Treasury yields, though the lack of triggers on the domeastic front kept prices in a narrow range, dealers said. The yield on the benchmark 10-year US Treasury note was at 4.36%, down from 4.44% at 1700 IST Monday. 

"There is no cue right now for the market to trade on. Looking at the volumes, it's just normal trading demand," a dealer at a primary dealership said. "Right now, US yields is the only cue, the prices may remain in this range until the GDP data comes out." 

Dealers said there wasn't much positioning ahead of the GDP print for Oct-Dec, due on Friday, as traders already have sufficient stock with them. Last week, the Reserve Bank of India at its open market operation purchase auction accepted a quantum for the 10-year benchmark 6.79%, 2034 bond that was lower than traders' expectations, dealers said.

However, state-owned banks were able to sell some illiquid papers from their 'held-to-maturity' books and that is likely to result in replacement demand from their side at the INR 410.54-billion state bonds auction on Thursday. The higher amount at the auction, revised from the earlier notified INR 380.54 billion, is likely to increase the yield spread between states' 10-year bond and the central government's 10-year benchmark 6.79%, 2034 gilt to 55 basis points, from the current 47 basis points, dealers said.

Higher supply of states' bonds, greater issuances of corporate bonds and heavy funds being raised through certificates of deposit are leading to a crunch in investors' apetite, as reflected in lower trade volumes in the gilts market, dealers said. Tight banking system liquidity is also a factor straining demand from investors' side, leading dealers to hope for further liquidity easing measures from the RBI. On Monday, the net liquidity injected by the RBI--a proxy for the systemic liquidity deficit—was at INR 1.93 trillion.

Traders expect gilt prices to remain in a narrow range. The marketwide turnover was INR 215.45 billion, compared with INR 138.50 billion at 1330 IST Monday, 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 6.68-6.75%. (Vidushi Rajpurohit)

India Gilts: Up on fall in US ylds; PSU bks look to buy state bonds for HTM

MUMBAI--0957 IST--Prices of government bonds were slightly up tracking an overnight fall in US Treasury yields, dealers said. Global investors fled to the safe haven asset after US President Donald Trump ordered a curb on Chinese investment in some US sectors. However, domestic bonds notched up only modest gains amid muted trade volumes due to lack of major domestic cues, dealers said. The marketwide turnover was INR 78.95 billion, compared with INR 34.05 billion at 0930 IST Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. 

Traders were cautious before the INR-410.54-billion state bond auction at 1030-1130 IST. The Reserve Bank of India revised Tuesday's state-bond auction to INR 410.54 billion from INR 380.54 billion earlier. The notified amount is less than the indicated amount of INR 499.07 billion, but still on the higher end compared with recent auctions.

Spreads between state bonds and gilts may increase because of heavy supply of the former. State-owned banks may prefer state bonds over central government securities as they look to lock in higher yields, especially to replenish their held-to-maturity books which have recently turned lighter after tendering bonds to the RBI. The RBI has bought nearly INR 1 trillion worth of gilts through open market operations through auction in Jan-Mar so far, most of which has been sold from state-owned banks' held-to-maturity books. 

"Not adding anything (from gilts) doesn't make a difference to book size because SGS(state bonds) are filling the gap," a dealer at state-owned bank said. "The 13-15 year segment (at the state bond auction) will see atleast 3-4 basis points spread increase, and even the 30-40 year papers."

Spreads between US yields and Indian gilts have been narrowing, with the yields between the 10-year benchmarks narrowing to a spread of 231 basis points, from 255 bps at the end of October. The narrower spread makes Indian bonds look less attractive in technical charts, restricting the fall in yields, dealers said. The yield on the benchmark 10-year US Treasury note fell to 4.38% at 0957 IST, from 4.44% at 1700 IST Monday. During the day, the yield on the 6.79%, 2034 bond is seen at 6.68-6.75%.  (Cassandra Carvalho)

India Gilts: Seen tad up on overnight fall in US ylds; state bond sale eyed

MUMBAI – Prices of government bonds are seen opening slightly higher tracking an overnight fall in US Treasury yields, dealers said. Investors fled to the safe haven asset after US President Donald Trump ordered a curb on Chinese investment in some US sectors. Gilt traders also await the INR-410.54-billion state bond auction at 1030-1130 IST. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.68-6.75%, compared with 6.70% on Monday. The yield on the benchmark 10-year US Treasury note fell to 4.38% at 0800 IST, from 4.44% at 1700 IST Monday. Trump's order on curbing Chinese spending in the US has put pressure on Asian markets, especially those in China, leading investors to lower-risk instruments such as US Treasury notes. The move to safe haven assets was also because the president reaffirmed his tariff orders on Canada and Mexico, which will be implemented next month. Traders now await US inflation data later in the week for cues on further rate cuts by the US Federal Open Market Commitee. The FOMC left rates unchanged in January.  

On the domestic front, prices may remain in a narrow range till Friday as traders will wait for India's Oct-Dec GDP growth data, hoping the print would cement views of an April rate cut, dealers said. Bond prices rose early Monday after the minutes of the Reserve Bank of India's Monetary Policy Committee's February meeting indicated a shift in the panel's focus to growth from inflation. India's GDP for Oct-Dec and the second advance estimate for 2024-25 (Apr-Mar) will be released at 1600 IST Friday. An Informist poll estimates the Oct-Dec reading at 6.3%, while bond traders estimate a print of around 6.4%. Traders said they have already placed their bets on such a reading, and were unlikely to initiate any large purchases or sales until the GDP data comes out.

Long-term bonds may fall after the RBI revised Tuesday's state-bond auction to INR 410.54 billion from INR 380.54 billion earlier, dealers said. The notified amount is less than the indicated amount of INR 499.07 billion, but still on the higher end compared to recent auctions. Spreads between state bonds and gilts may increase because of the heavy supply and state-owned banks may prefer state bonds over gilts, as they look to lock in higher yields, especially to fill in their held-to-maturity books, dealers said.  

Traders will also remain cautious awaiting cues on further bond purchases by the RBI, dealers said. Some bond traders were awaiting an open market purchase auction announcement by the RBI post market hours Monday, while most were of the view that an auction this week was unlikely after the RBI announced a dollar/rupee buy/sell swap scheduled for Friday. Gilt prices may also take cues from the movement of the rupee against the dollar, dealers said. (Cassandra Carvalho)  

End

US$1 = INR 87.21

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

Edited by Tanima Banerjee

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