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Informist, Wednesday, Mar. 12, 2025

By Vidhushi RajPurohit

MUMBAI – Prices of government bonds ended higher after India's CPI data for February eased to a seven-month low to 3.61%, below traders' expectations of 3.7-4.2%, dealers said. With the print below the Reserve Bank of India's medium-term target of 4%, traders bet on another 25-basis-point cut in the repo rate to 6.0% in April.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.75, or 6.68% yield, against INR 100.67, or 6.69% yield, Tuesday. Gilt prices were up throughout the day as traders were positioning before the inflation data, with an Informist poll already seeing it at 3.9%. Headline retail inflation had briefly dropped to 3.6-3.7% in July and August last year after spending nearly five years above the RBI's medium-term target.

Even with headline inflation below estimate, the rise in core inflation weighed on gilt prices, dealers said. Core CPI inflation in February rose to 4.0%, the highest level in 15 months. Some likely profit booking from state-owned banks also capped gains as the yield on the 10-year benchmark hovered near 6.68%--a psychologically crucial level, they said.

"The inflation reading is better than what we were expecting so the rate cut hopes are intact, but the core inflation came high which limited price momentum," a dealer at a private bank said.  

For the early part of the day, bond prices were steady, and even when they rose, gains were capped on caution before the details of the RBI's bond buys and the CPI data. Even as bond prices were little changed after the OMO auction result, some traders trimmed their gilt holdings as the cut-off prices on most bonds were lower than expected, indicating bonds were sold out of 'held-to-maturity' portfolio rather than trading books.

Only the 7.10%, 2034 bond and 7.23%, 2039 bond's cut-off prices were higher than the median of an Informist poll among the six bought by the RBI, with banks having most of the stock on both bonds in their trading books, rather than in the 'held-to-maturity' category. The other four bonds were tendered at a discount as banks looked to maximise trading profits at the year-end, dealers said. Bond sales to the RBI at OMO auctions do not count towards the limit of selling only 5% of the 'held-to-maturity' portfolio in a financial year, imposed at the beginning of FY25 through the RBI's new accounting guidelines. 

The 7.10%, 2029 bond had the largest quantum accepted at the auction as most banks had the paper in substantial quantum in their portfolios, dealers said. Banks typically hold gilts maturing in less than five years to match their liabilities on the deposit side. The paper was also auctioned for the first time, while three of the longer-term bonds had been bought by the RBI at the OMO auctions in Jan-Feb.  

Post the auction, traders picked up the 15-year benchmark 6.92%, 2039 bond as a replacement for the illiquid 2039 gilt that the RBI bought, despite the central bank accepting only INR 23.39 billion worth of offers for the bond. Since the cut-off price was also higher than expected, traders shifted to the most heavily traded paper on expectations bond prices will pick up in the coming day. The 15-year benchmark yield touched 6.83%, the lowest level in a month.

Traders remained uncertain about the replacement demand from banks, as they refrained from heavy bond purchases in the secondary market after the INR 1 trillion worth of OMO auction buys by the RBI in Jan-Feb. However, with the supply-demand mismatch in March – the central bank is set to buy INR 1 trillion of gilts at a time when there is no supply – gilt prices are likely to rise in the remainder of the month with the RBI's steps seen keeping liquidity conditions despite significant outflows. Moreover, banks' preference towards restocking their portfolio with higher-yielding state bonds may be nearing an end as internal asset-liability management norms cap the split between central and state government bonds in the 'held-to-maturity' portfolio, dealers said.

"The auction went well as most banks got to clear their HTM (held-to-maturity) books, but as the 10-year benchmark paper was not there at the auction and the focus of the market was on CPI the result did not lead to any movement in the prices," a dealer at a state-owned bank said. "The main thing is now how liquidity evolves from here as market will start gradually positioning for rate-cut."

During the day, foreign banks were likely the major buyers as they picked up gilts on hopes of a repo rate cut, dealers said. Traders expect the yield on the 10-year benchmark gilt to ease to 6.50% should the MPC cuts the repo rate in April as dealers have not yet began positioning aggressively for policy easing. Trade volumes have also been muted largely on account of absence of significant triggers in the market and the focus of most banks to manage their credit disbursal target near financial year end. 

Owing to OMO auction and the CPI data release, the trade volumes picked up Wednesday. The marketwide turnover for the day was INR 429.55 billion, up from INR 315.60 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, same as on Tuesday.

OUTLOOK

On Thursday, gilt prices are likely to take cues from the movement on US Treasury yields at opening after US CPI inflation data for February which released post market hours Wednesday. The inflation print rose 0.2% on month, against the 0.3% estimate according to a Dow Jones poll. The data may lend cues to the US Federal Open Market Committee's decision on rates. The FOMC is scheduled to meet next week.

Prices might also remain up after India's CPI inflation eased to 3.61% in February, below the Reserve Bank of India's 4% medium-term target. It was also below the expectation of 3.9% in an Informist poll. Bond prices may rise sharply as rate cut bets for April intensify, with further bets on rate cuts in June or August also in traders' minds.

Traders may also assess developments related to US tariff policy and the rupee's movement against the dollar, dealers said. Crude oil prices could also be a trigger if they move significantly. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.72% during the day.

India Gilts: Erase gains as core CPI up, despite headline inflation relief

MUMBAI--1630 IST--Government bond prices rose after headline CPI inflation in February fell to the lowest level in seven months, dealers said. However, bond prices erased most of the gains as core CPI inflation was higher than expected and hit 4% for the first time in 2024-25 (Apr-Mar).

India's CPI inflation for February fell to 3.61%, falling below the RBI's 4% medium-term target for the first time since August. CPI inflation stood at 4.26% in January and 5.09% in February 2024. Inflation data boosted traders' expectations of a rate cut by the Reserve Bank of India's Monetary Policy Committee at its next policy review in April.

An Informist poll has estimated the February CPI inflation at 3.9%. Traders had expected a reading between 3.7% and 4.2%, with the positive surprise immediately leading to a surge in bond prices. However, core CPI inflation rose to 4.0% in February, the most in 15 months, from 3.7% in January.

"CPI is better than expected, I was expecting at least 3.7-3.8%, but not this. But core inflation is really high," a dealer at a state-owned bank said. "But traders had already positioned in the past two days, so that's why market reaction is limited."

The rise in bond prices was also capped as the April rate cut is priced in, and selling pressure picked up as the 10-year gilt yield fell below the psychologically crucial 6.68% mark, dealers said. Moreover, some traders were cautious before the release of US CPI inflation after market hours.

The market-wide turnover was INR 382.00 billion, against INR 283.50 billion at 1630 IST Tuesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the remaining of the day, the yield on the 6.79%, 2034 bond is seen at 6.65-6.72%.  (Srijita Bose)

India Gilts: Little changed after OMO auction results; Feb CPI in focus

MUMBAI--1528 IST--Prices of government bonds were little changed after the results of the Reserve Bank of India's INR-500-billion open market purchase of gilts, despite lower than expected cut-off prices. Traders shifted their focus to India's February CPI print at 1600 IST, which is expected to spur bond prices higher, dealers said.

Cut-off prices on four of the six gilts at the open market operation auction were sharply below estimates. Only the 7.10%, 2034 bond and 7.23%, 2039 bond's cut-off prices were higher than the median of an Informist poll, with banks having most of the stock on both bonds in their trading books, rather than in the 'held-to-maturity' category which they tendered at a discount, dealers said.

"I don't think the market reaction will be much because the OMO auction was for investor participants (banks' ALM desks and long-term investors), and traders (in the secondary market) won't be reacting to the cut-offs," a dealer at a private bank said. 

Most dealers had estimated that the RBI would accept the 7.41%, 2036 gilt in the largest quantum. The RBI bought INR 117.69 billion of the gilt, second to the INR 151.54 billion of the 7.10%, 2029 gilt it purchased. The illiquid 2036 gilt was the main offering from banks' 'held-to-maturity' books, even after the RBI bought INR 100.05 billion of the gilt at the previous OMO auction on Feb. 20.

Mutual funds continued to sell gilts heavily in the secondary market, sales of which were absorbed by foreign banks, dealers said. With another RBI OMO auction to buy gilts next week, banks would sell bonds and use the fresh room in their portfolios to build trading positions ahead of the April meeting of the RBI's Monetary Policy Committee.

Positioning ahead of a much-anticipated rate cut by the RBI's Monetary Policy Committee in April has been gradual this year, the pace of which has picked up this week, dealers said. India's CPI print for February, due at 1600 IST, is expected to be lower than 4%, the RBI's medium-term target. Bond prices may inch up in the run-up to the print, though the 10-year yield may not fall below the crucial 6.68% mark unless headline retail inflation is 3.7% or lower, dealers said.

At 1430 IST, the marketwide turnover was INR 253.55 billion compared with INR 230.20 billion at the same time on 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 6.67-6.72%. (Cassandra Carvalho)

India Gilts: Up ahead of OMO auction result, Feb CPI data

MUMBAI--1320 IST--Prices of government bonds were slightly higher on expectations that India's CPI inflation print for February, due at 1600 IST, would be lower than 4.0%, dealers said. Trader were also picking up bonds before the result of the INR 500-billion gilts purchase by the Reserve Bank of India at an open market operation auction on Wednesday. The 10-year gilt yield eased to the psychologically crucial 6.68% mark, after which traders sold gilts at a profit and capped the gains.

Dealers expect gilt prices to remain volatile, depending on the auction result and the positioning of traders ahead of the inflation data. An Informist poll showed economists see February's retail inflation print at 3.9%, below the RBI's medium-term target of 4%, due to a fall in food prices.

"It is an eventful day, we were expecting the prices to be steady but it went up as traders will be looking to build some positions before CPI data and most market is of the view that the print will be around 3.9%," a dealer at a state-owned bank said. "If there is no disappointment from the OMO auction, then prices may remain up."

Traders were of the view that most banks would offer bonds aggressively at the OMO auction as they had the bonds in their 'held-to-maturity' books and preferred to book profits near the end of the financial year in March. The six bonds that RBI has offered to buy are the 7.10%, 2029 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.40%, 2035 gilt, 7.41%, 2036 gilt, and 7.23%, 2039 gilt.

Dealers expect the RBI to accept the largest quantum for the former 10-year benchmark 7.10%, 2034 bond which has a large outstanding maturity of INR 1.80 trillion. However, it may not be offered at a discount as it is typically the second-most traded paper in the secondary market. However, for the illiquid 7.40%, 2035 and 7.41%, 2036 papers, traders expect state-owned banks' offers to pull down cut-off prices to a substantial discount. For the 7.23%, 2039 gilt, which was issued earlier in FY25, traders expect the quantum accepted to be low as most banks do not have the gilt in their held-to-maturity portfolios.

The marketwide turnover was INR 163.55 billion, sharply lower than INR 94.95 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 6.65-6.72%.  (Vidhushi RajPurohit)

India Gilts: Steady; trade volumes dull ahead of OMO auction, Feb CPI

MUMBAI--0936 IST--Prices of government bonds were steady ahead of the Reserve Bank of India's INR 500-billion open market purchase of gilts through an auction at 1030-1130 IST, along with India's CPI data for February at 1600 IST, dealers said. Volumes were minuscule amid a handful of total trades.

The marketwide turnover was INR 5.72 billion, sharply lower than INR 32.10 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 6.65-6.72%. 

In the first tranche of its INR 1-trillion purchase of gilts through auction, the RBI has offered to buy an aggregate amount of INR 500 billion of six bonds – the 7.10%, 2029 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.40%, 2035 gilt, 7.41%, 2036 gilt, and 7.23%, 2039 gilt. The 7.18%, 2033 gilt and the 7.10%, 2034 gilt are erstwhile 10-year benchmarks and the 7.23%, 2039 gilt is a former 15-year benchmark. A large chunk of these gilts are held in banks' held-to-maturity portfolios, dealers said. Dealers expect the largest quantum at the auction to be accepted for the illiquid 7.40%, 2035 and 7.41%, 2036 papers. Banks are expected to offer the bonds at a discount to their indicative prices published by Financial Benchmarks India Ltd. on Tuesday to generate profits in the Jan-Mar quarter.

"Today our market is steady because of OMO only, and CPI is there. It's expected to come lower... below 4%," a dealer at a state-owned bank said. 

Unless there is a surprise in the OMO auction result, prices may remain in a thin band even after the auction bidding ends. An Informist poll showed CPI inflation is February would fall to a six-month low of 3.9%, and traders said a reading between 3.7% and 4.2% may not generate any movement in gilt prices.(Cassandra Carvalho)

India Gilts: Seen steady before OMO buy, Feb CPI; rise in US ylds may weigh

MUMBAI – Prices of government bonds are seen opening steady ahead of the Reserve Bank of India's INR 500-billion open market purchase of gilts through an auction at 1030-1130 IST, dealers said. An uptick in US Treasury yields may weigh on bond prices at open. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.65-6.72%, compared with 6.69% on Tuesday. In the first tranche of its INR 1-trillion purchase of gilts through auction, the RBI will offer to buy an aggregate amount of INR 500 billion of six bonds – the 7.10%, 2029 gilt, 7.18%, 2033 gilt, 7.10%, 2034 gilt, 7.40%, 2035 gilt, 7.41%, 2036 gilt, and 7.23%, 2039 gilt. The 7.18%, 2033 gilt and the 7.10%, 2034 gilt are erstwhile 10-year benchmarks and the 7.23%, 2039 gilt is a former 15-year benchmark. A large chunk of these gilts are held in banks' held-to-maturity portfolios, dealers said. 

Most banks are expected to bid aggressively at the auction, driving down prices, as traders look to book profits from their held-to-maturity books. Some traders, however, may look for higher cut-off prices after selling gilts nearly 15-20 paise below secondary market valuations at the previous OMO auctions held in Jan-Mar, dealers said.

The movement of bond prices in the secondary market may take cues from the result of the OMO auction. Traders may also pick up the benchmark 10-year 6.79%, 2034 gilt on hope that the RBI will offer to buy the liquid paper at the next OMO auction on Tuesday. 

At the same time as the OMO auction, the RBI will auction INR 140 billion of 91-day Treasury bills, INR 120 billion of 182-day T-bills, and INR 70 billion of 364-day T-bills. While bidding for two auctions simultaneously is unlikely to pose a problem for traders, technical issues may crop up, dealers said. The RBI extended bidding timings for the past two state bond auctions due to a technical lag in the e-Kuber bidding portal. The last time the RBI held the OMO and T-bill auctions simultaneously, on Feb. 20, it had rejected all bids for the 91-day and 182-day T-bills, likely due to poor bidding, dealers said. 

Prices may remain steady ahead of India's CPI data for February, due at 1600 IST. A poll of 16 economists by Informist estimated the reading at a six-month low of 3.9%, primarily due to a further decline in food prices. Traders are not building aggressive positions before the data since a reading of 3.7-4.2% is priced in, dealers said. Bond prices may only see significant movement if the print is below 3.7% or above 4.2%. 

On the global front, US Treasury yields rose ahead of US CPI inflation data for February, due at 1800 IST. The yield on the benchmark 10-year US Treasury note rose to 4.27% from 4.23% at 1700 IST Tuesday. Core CPI is expected to rise 3.2% from February last year, according to consensus estimates from The Wall Street Journal. The data may lend cues to the US Federal Open Market Committee's decision on rates. The FOMC is scheduled to meet on Mar. 18-19, and is expected to hold rates steady. The US job openings and labour turnover survey for January, released post market hours on Tuesday, showed job openings were better than expected and hiring edged up while lay-offs fell. (Cassandra Carvalho)

End

US$1 = INR 87.20

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

Edited by Deepshikha Bhardwaj

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