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Informist, Wednesday, Mar. 19, 2025

By Cassandra Carvalho

MUMBAI –  Prices of government bonds ended higher across tenures on Wednesday after the Reserve Bank of India Tuesday announced an INR 500-billion open market purchase of gilts through an auction. The announcement, made post market hours, was seen as a precursor to further repo rate cuts. Some gains were erased in the benchmark 10-year gilt on sales from state-owned banks as its yield briefly fell below 6.65%, the lowest since early February, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 100.90, or 6.66% yield Wednesday, against INR 100.82, or 6.67% yield, Tuesday. The yield has fallen 5 basis points already this week as traders ramp up their bets on the RBI's Monetary Policy Committee cutting the repo rate in April and further policy easing.

The RBI's OMO announcement spurred purchases from traders who looked to replenish their 'held-to-maturity' books, after the central bank bought INR 2 trillion of gilts through auction in Jan-Mar so far. Lower than expected cut-off yields at the state bond sale Tuesday also aided the rise in bond prices, and demand for state bonds increased from foreign portfolio investors and asset and liability management desks of banks. Traders said further tenders, including in the bonds on offer at next week's auction, will be at less aggressive prices, as banks have booked sizeable profits on these auctions earlier. The RBI has offered to buy the 7.04%, 2029; 7.17%, 2030; 7.26%, 2032; 7.26%, 2033; 7.50%, 2034, and 7.18%, 2037 bonds on Tuesday.

The OMO auction next week is over and above the INR 1 trillion of gilt buys the RBI had announced on Mar. 6, which were seen as the only likely gilt buys in March. Traders considered the RBI's intent on liquidity infusion a precursor to a further rate cut of 25-bps by the Monetary Policy Committee in April. Gilt prices have stagnated despite the rate-setting panel cutting the repo rate to 6.25% from 6.50% in early February due to lack of transmission into the broader financial system, largely due to a persistent liquidity deficit. The OMO announcement Tuesday was a boost to market sentiment, and traders bet on a 25 bps rate cut by the RBI's Monetary Policy Committee in April, with some expecting a 50 bps cut. Traders anticipate at least three more cuts in 2025, after the first in February, an improvement from expectations of not more than two cuts earlier in the month.

Traders are also hopeful of the MPC changing its stance from 'neutral' to 'accommodative' in April, and now expect a surplus in systemic liquidity to enhance transmission of rate cuts, dealers said. Some also expect a larger rate cut, with further rate cuts and liquidity easing likely to bring down overnight money market rates to near 5.50% by the end of 2025 from above 6.25% currently.

"OMO is a good way to give us surplus liquidity, and for the RBI to increase its balance sheet while getting good prices," a trader at a primary dealership said. "We need surplus liquidity for the rate cut transmission when it happens in April."

Bonds maturing in 30 years or more continued to outperform gilts of other tenures, as insurance companies and pension funds who had missed out at the state bond auction Tuesday fulfilled their requirements by buying them, dealers said. Foreign portfolio investors remained keen on state bonds even in the secondary market, picking up bonds maturing in 7-10 years.

With the lower-than-expected cut-off yields at the auction and the longest tenure state bond on offer only 22 years on Tuesday, long-term investors piled into gilts, as they have done in March. The 40-year benchmark 7.34%, 2064 bond --the most-traded long-term bond -- rose for the 10th straight trading session, during which time it had gained INR 2.25, a bumper return for a trader. On Wednesday, it closed below 7% yield for the first time since Dec. 16.

Demand for gilts of maturities between eight and 15 years -- tenures the RBI has preferred at its OMO buys -- rose, including the 7.10%, 2034 gilt. Traders exited the current benchmark to buy the erstwhile 10-year benchmark, which offered a higher yield, on expectations that the RBI would issue a new 10-year benchmark in April and the 6.79%, 2034 bond would also go off-the-run soon. The central government is expected to announce the borrowing calendar for Apr-Sept by next week. The government has issued a new 10-year bond in the first auction in each of the last two borrowing calendars.

In early trade, the benchmark 10-year 6.79%, 2034 gilt was sharply higher, briefly hitting the day's high of INR 101.00, but the bond's exclusion from the RBI's choice of OMO buys for the last few auctions led traders to prefer other gilts. Lack of buying momentum below the crucial 6.65% yield also hampered the bond throughout the day, with state-owned banks selling stock bought at around 6.70% – as late as Monday – at a profit.

"Next quarter, by second week of April we should have a new 10-year benchmark, so it'll be better to hold the 7.10% (2034 gilt) for now because the 6.79% (2034 gilt) won't be as attractive if there's a new benchmark," a dealer at a state-owned bank said.

The yield on the seven-year benchmark 7.02%, 2031 gilt fell below the 10-year benchmark after remaining in line or higher than the longer-tenure gilt for the past two weeks, falling below 6.65% for the first time since Jan. 28. The RBI has offered to buy two short-term bonds at its next OMO auction and traders expect the seven-year paper to be picked up into their portfolios as replacement, dealers said. Increased expectations of a rate cut and lucrative yield levels also prompted traders to pick up the gilt, they said.

Foreign banks continued to buy gilts during the day, but some booked profits after purchasing gilts Tuesday, dealers said. Foreign banks have net bought INR 240.90 billion of gilts in the secondary market in March until Tuesday, and have been top net buyers for the majority of the month, data from Clearing Corp. of India showed. FPIs refrained from aggressive purchases on caution ahead of the US Federal Open Market Committee meeting outcome, due at 2330 IST.

The market-wide turnover for the day was INR 546.00 billion, up from INR 483.30 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, for the sixth consecutive day.

OUTLOOK

On Thursday, gilt prices may take cues from the movement of US Treasury yields after the US FOMC meeting outcome at 2330 IST. The two-day FOMC meeting began Tuesday and the panel is expected to hold rates steady. However, traders will closely watch for the committee's view on the US' economic trajectory, along with comments from US Federal Reserve Chair Jerome Powell on President Donald Trump's imposition of tariffs and concerns of slowing growth.

Bond prices have not been closely tracking the movement of US Treasury yields the past two weeks, and may sustain Wednesday's momentum as traders bet on the possibility of further domestic rate cuts and a stance change by the Monetary Policy Committee to 'accommodative' in April.

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 6.62-6.70% during the day.

India Gilts: Remain up as traders see fresh RBI OMO buy a rate cut precursor

MUMBAI--1618 IST--Prices of government bonds remained up after the Reserve Bank of India announced the sixth open market purchase of gilts through auction in Jan-Mar, which was seen as an indicator that the central bank aims to ensure a liquidity surplus in addition to cutting rates, dealers said. The price of the 10-year benchmark 6.79%, 2034 was off highs as traders sold the bond near the psychologically crucial 6.65%, the lowest level since early February.

Demand from pension funds and insurance companies led to long-term bonds outperforming other tenures, with the 40-year benchmark 7.34%, 2064 bond on track for its tenth straight day of gains. Foreign portfolio investors were likely on the sidelines, with minor sales, ahead of the US Federal Open Market Committee meeting outcome due at 2330 IST. However, FPIs bought state bonds maturing within 7-10 years, dealers said. 

Traders have priced in a 25-basis-point repo rate cut in April, but remain divided on whether the Monetary Policy Committee will soften its policy stance to 'accommodative' from 'neutral'. With its third INR 500-billion gilt buy through open market operation auction in March, traders are increasingly betting on a stance change, which may effectively bring down overnight rates by nearly 75 bps, equivalent to three rate cuts, in 2025, dealers said. The OMO auction on Tuesday is expected to see higher cut-off prices as the need of banks to book profits has been largely fulfilled in the gilt buys worth INR 2 trillion in auctions so far in Jan-Mar, dealers said.  

Bond prices have been stagnant since the MPC first cut the repo rate by 25 bps in February, as replacement demand from previous OMO auctions was seen picking up only when systemic liquidity improved in April. However, banks have begun refilling their 'held-to-maturity' books this week, slightly earlier than foreseen. With another OMO announcement Tuesday, the need to refill stocks as well as the positive sentiment on rate cut buoyed prices. Lower-than-expected state bond cut-off yields at auction Tuesday were also a result of replacement demand, dealers said.

Price movement of the benchmark 10-year 6.79%, 2034 gilt was limited, compared to most tenures, as traders have already positioned heavily on the bond. Moreover, expectations of the RBI issuing a fresh 10-year gilt in April deterred traders from building stock of the current benchmark. The central government is expected to announce the borrowing calendar for Apr-Sept by next week. The government has issued a new 10-year bond in the first auction in each of the last two borrowing calendars. 

At 1630 IST, the market-wide turnover was INR 469.30 billion, against INR 408.45 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 6.64-6.72%. (Cassandra Carvalho)

India Gilts: Remain up on Apr rate cut view after RBI's OMO buy announcement

MUMBAI--1325 IST--Government bond prices remained up after the Reserve Bank of India on Tuesday announced INR 500 billion worth of gilt purchases through an open market operation auction next week, which bolstered expectations of a rate cut in April, dealers said. Gains were however capped as traders sold bonds at a profit after the yield on the 10-year benchmark 6.79%, 2034 paper touched its lowest level since Feb. 7.

"The market's sentiments are good right now, we could see a yield nearing 6.60% (on the 10-year benchmark gilt) by the end of March because of continuous liquidity boost by RBI," a dealer at a primary dealership said. "Poeple are already a little heavy in 10-year so other bonds...the seven-year paper should also now see good demand."

Yield on the seven-year benchmark 7.02%, 2031 gilt fell below the 10-year benchmark, touching 6.65% for the first time since Jan. 28. The RBI has offered to buy two short-term bonds at its next OMO auction and traders expect the seven-year paper to be picked up into their portfolios as replacement, dealers said. Increased expectations of a rate cut and lucrative yield levels also prompted traders to pick up the gilt, they said.

Demand for the gilts to be purchased at the next OMO auction picked up as traders do not expect the bonds to be tendered at a significant discount to the secondary market prices, unlike the auctions so far, dealers said. Traders expect a large chunk of the 7.04%, 2029 bond to be sold from trading porfolios at prevailing market prices or higher, they said. Demand for long-term bonds also remained up on the expectation that the share of 30-50 year bond supply would fall in the Apr-Sept borrowing calendar, from 38.6% in Oct-Mar. 

A majority of traders are shifting their base case for rate cuts by the RBI's Monetary Policy Committee to at least 50 basis points in the next 12 months, after CPI inflation fell below the central bank's medium-term target of 4% in February. Gilt prices have so far not reflected the shift, unlike overnight indexed swap rates, due to persistently tight liquidity. Some traders are also betting on the RBI's rate-setting panel changing its stance to 'accommodative' from 'neutral' at the April policy review to signal loosening of monetary policy, dealers said. Overnight rates, and consequently traders' funding costs to buy gilts, may fall to near 5.50% by the end of 2025 from slightly above the 6.25% repo rate now, they said.

State-owned banks who picked up gilts when the yield on the 10-year benchmark was near 6.70% likely sold the bond at a profit, dealers said. Meanwhile, mutual funds and private banks were likely on the buying side, they said.

The market-wide turnover was INR 331.15 billion, against INR 65.95 billion at 1330 IST on 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 6.64-6.72%.  (Srijita Bose)

India Gilts: Up after RBI's OMO announcement, gains capped on profit-booking

MUMBAI--1000 IST--Prices of government bonds were up after the Reserve Bank of India on Tuesday announced INR 500 billion worth of gilt purchases through open market operation auction next week, dealers said. The gains were, however, capped as traders sold gilts to book profits near the year-end, as the yield on the 10-year benchmark 6.79%, 2034 gilt neared the 6.65% level. 

After market hours on Tuesday, the RBI announced it would conduct a third OMO buy auction in March. It has already purchased gilts amounting to INR 1 trillion this month through two OMO auctions. The announcement is seen by traders as preparatory step before cutting the repo rate by another 25 basis points in April. Many were also of the view that the RBI's Monetary Policy Committee might also announce a change of stance to 'accommodative' from 'neutral' at its upcoming review in a further signal that monetary conditions would ease. 

"The continuous and enormous auctions by the RBI is signalling very strongly that a rate cut is surely going to be there at the next MPC meeting," a dealer at a private bank said. "The liquidity deficit is still above INR 2 trillion and RBI might be aiming for a surplus liquidity in April before delivering rate cut."

Dealers expect prices of gilts across tenures to remain up during the day after the OMO buy announcement. The added liquidity will support prices of bonds maturing in under five years, while replacement demand for the OMO auction next week will keep bonds maturing in 8-15 years well bid for, they said. 

Gains were capped as the market was rife with speculation of an OMO announcement on Tuesday, which had already driven up prices, dealers said. Traders who had bought the previous day were likely to be selling gilts at a profit now, they said. Moreover, profit-booking by state-owned and private banks kept gilt prices in check, with the 10-year gilt yield at its lowest since early February.

Trading volumes shot up with the positive trigger, and traders are expected to position for a rate cut after not adding to their portfolios earlier due to tight liquidity conditions expected till end-March, dealers said. The market-wide turnover was INR 104.00 billion, against INR 20.15 billion at 1030 IST on 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 6.64-6.72%. (Vidhushi RajPurohit)

India Gilts: Seen higher on RBI's INR 500-bln OMO buy announcement

MUMBAI – Government bond prices are likely to open higher after the Reserve Bank of India's announcement after market hours on Tuesday that it would conduct a third open market operation auction worth INR 500 billion in March, dealers said. However, the gains might be capped as banks may sell gilts to book profits near the financial year-end on Mar. 31, dealers said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.64-6.72%, compared with 6.67% on Tuesday. The benchmark yield ended at its lowest since Feb. 6 on Tuesday as traders had speculated that the RBI would conduct another OMO auction in March. 

The auction is likely to propel gilt prices much more than prior ones as traders' takeaway from the result of Tuesday's OMO purchase by the RBI was that the motivation for profit-booking was falling and banks were not tendering bonds at deep discounts to their market prices, after INR 2 trillion worth of gilt buys by the RBI at auction since Jan. 30, dealers said.

The added liquidity will spur bets on rate cuts and may support prices of bonds maturing in under five years, while replacement demand for the OMO auction next week will keep bonds maturing in 8-15 years well bid for, they said. The RBI will buy six gilts at its next auction on Tuesday – the 7.04%, 2029; 7.17%, 2030; 7.26%, 2032; 7.26%, 2033; 7.50%, 2034, and 7.18%, 2037 bonds.

Traders almost universally expect the RBI's Monetary Policy Committee to cut the repo rate by 25 basis points at its next meeting in April. Consequently, traders expect foreign banks to continue their purchases of gilts in the secondary market. So far in March, foreign banks have net bought INR 240.9 billion of gilts in the secondary market, and have been top net buyers for the majority of the month, data from Clearing Corp of India showed. However, gilt prices may be capped as state-owned banks could shed gilts to book profits for earnings near the year-end, particularly with the 10-year gilt yield below the psychologically crucial 6.68% level, dealers said. 

Moreover, some traders expect foreign banks' activity to be muted due to caution ahead of the US Federal Open Market Committee's rate decision at 2330 IST, dealers said. Liquidity conditions also remain tight until the end of March due to goods and services tax outflows scheduled at the end of this week, leading banks to use bond sales to generate liquidity for credit disbursal. This may cap gains in gilts until the first week of April, dealers said. (Vidhushi RajPurohit)

End

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

Edited by Ashish Shirke

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