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Informist, Friday, Mar. 21, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended higher for the fifth straight day as traders stocked up on gilts in anticipation of a rate cut and a potential softer stance by the Reserve Bank of India's Monetary Policy Committee in April, dealers said. Profit booking through the day capped the rise in prices, especially with yields across tenures falling to their lowest level in three years.

The 10-year benchmark 6.79%, 2034 bond ended at INR 101.15, or 6.62% yield Friday, its lowest closing level since January 2022. The bond ended at INR 101.07, or 6.64% yield, Thursday. The five-year benchmark 6.75%, 2029 bond ended at INR 100.99, or 6.50%, its lowest close since Apr. 7, 2022. The benchmark 10-year gilt yield has fallen 7 basis points since Mar. 13, while the 5-year benchmark has fallen 10 bps in the same period.

Traders placed bets that the Monetary Policy Committee would cut the repo rate by 25 basis points to 6.00% at its meeting next month, and the RBI was looking to infuse enough liquidity to ensure better transmission of the rate cut to the banking system. With the central bank conducting another open market operation auction next week, over and above the INR-1-trillion of bond buys through the auction so far in March, traders were also of the view that the rate-setting panel will change its stance to 'accommodative' from 'neutral'. Three of the six members on the MPC are from the RBI, including Governor Sanjay Malhotra.

Banks, particularly state-owned lenders, also continued to refill their 'held-to-maturity' books with illiquid bonds, which have higher yields than heavily traded securities, to refill off-the-run gilts sold to the RBI at its OMO auctions worth INR 2 trillion so far in Jan-Mar. Some traders also positioned ahead of Tuesday's INR-500-billion open market auction, picking up gilts of maturities within 7-15 years, akin to the choice of bonds the RBI will buy next week. State-owned banks were also in favour of picking up higher-yielding state-owned securities of similar maturities, and two banks were aggressive with their purchases on Friday, dealers said.

"The rally has in a way run off, what we're seeing now is just trading activity picking up after a slump," a dealer at a private bank said. "But if we're expecting 6.60% by March end only, then there's good reason to buy now only."

The rush for state bonds continued Friday, with trades worth more than INR 20 billion in these securities during the day. The yield on 10-year state bonds has fallen nearly 10-15 basis points from a month ago, and traders expect spreads over gilt yields to compress sharply in the June quarter due to seasonally lower supply, dealers said. Along with state-owned banks, pension funds also invested in these papers due to higher returns compared to central government bonds. 

The rupee posted its biggest weekly gain in over two years, with the RBI turning to buying dollars in the secondary market. This would further inject rupee liquidity into the banking system, a positive for gilts, against concerns earlier that the central bank would have to consistently sell dollars to prevent a fall in the domestic currency, dealers said.

Foreign portfolio investors had also net bought nearly INR 80 billion of fully accessible route gilts in the week to Thursday. FPIs, however, were net sellers Friday, with sales worth INR 5.26 billion, according to Clearing Corp. of India data as of 1730 IST. Traders view the sales as temporary profit-booking, and are closely tracking further inflows as it would boost the already-positive movement of prices. The gains in the rupee were also offering FPIs better currency-adjusted exits, dealers said.

Some traders were of the view that gains in segments other than bonds maturing in 5-15 years were overdone. With the last major tranche of tax outflows on Friday, and the RBI scheduled to infuse nearly INR 1.4 trillion of durable liquidity next week through gilt buys and a foreign exchange swap, dealers expect a rush for short-term bonds next week. The spread on 10-year gilt over the 5-year 6.75%, 2029 bond could rise to 20 bps from nearly 12 bps currently by end of March, they said.

Some dealers said that papers of 7-15 years of maturity were still lucrative purchases due to their per basis point gain in the face of a rate cut. The yield spread on the 15-year benchmark 6.92%, 2039 bond over the 10-year benchmark has compressed to nearly 14 bps from 16 bps a month ago and traders expect the spread to compress to around 3 bps by the month-end, dealers said.

The 'bull-steepening' in the yield curve—a sharper fall in short-term rates than other tenures ahead of a rate cut-—is already underway as the RBI's proactivity in liquidity injection is expected to keep funding costs comfortable for the rest of March. After outperforming in other tenures earlier this week, long-term gilt prices traded in tandem with other tenures due to demand from life insurers and pension funds for these gilts, after 30-50 year bond yields fell below 7%. Mutual funds, however, were trimming stock of short-term Treasury bills to invest in long-term gilts on the view that capital gains would be higher in those segments.

The market-wide turnover for the day was INR 608.15 billion, lower than INR 751.60 billion Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. However, trade in the 'Reported Deals' segment of NDS-OM jumped, which is not reflected in the above figure. There were no trades using the wholesale digital rupee pilot for the eighth consecutive day. 

RUSH FOR TREASURY BILLS
With speculation brewing since Wednesday, traders rushed to purchase Treasury bills on the view that the government would skip its last scheduled auction for INR 330 billion worth of the short-term borrowing instruments next week. The buys were aggressive from state-owned banks for bills maturing up to three months in the second half of trade, dealers said.

The expectations had grown on speculation the government was sitting on a large cash pile and its spending may not match its heavy tax collections over the past week, both from advance tax payments in mid-March and the goods and services tax payments Friday. Moreover, traders also cited the RBI's rejection of all bids in the 91- and 182-day T-bills at a February auction as a sign that the government would be uncomfortable in raising money at high cut-off yields.

The 91-day T-bill's cut-off yield at auction this week was 6.5050%, rising from the previous week and well above the policy repo rate of 6.25%. The cut-off yield may drift higher at the end of March when banks are focused on credit disbursal and mutual funds also have redemption pressures, dealers said.

However, post market hours, the RBI announced the usual weekly sale of INR 140 billion of 91-day T-bills, INR 120 billion of 182-day T-bills and INR 70 billion of 364-day T-bills to be conducted on Wednesday. 

OUTLOOK

Gilts are not traded Saturday. On Monday, gilt prices may continue to rise 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 will also await any announcement by the RBI on liquidity, and may also take cues from overnight lending rates. Traders may also take cues from the notified quantum for Tuesday's state bond auction. Eighteen states will raise INR 566.21 billion via bonds Tuesday, slightly higher than the indicated amount of INR 540.65 billion. Traders also await the central government's borrowing plan for Apr-Sept and states' borrowing plan for Apr-Jun, due at the end of March.

Traders may also assess developments related to US tariff policy and the rupee's movement against the dollar, dealers said. US Treasury yields and 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 6.60-6.65% during the day.

India Gilts: Off highs on profit-booking, on track for fifth day of gains

MUMBAI--1615 IST--Finding yield levels lucrative, traders continued to book profits on their government bond holdings, though prices were on track for the fifth straight day of a rise, dealers said. The yield on several gilts, including the 10-year benchmark, hit their lowest levels in three years after traders started aggressively buying bonds on hope of a softer stance and a rate cut at the April monetary policy review. Some selling by overseas investors also kept the gains capped.

"Looking at the price movement, it looks like most of the buying of gilts was for dealers' trading books and there is no mid-or long-term investment view," a dealer at a state-owned bank said. "Traders still have time to build their portfolios and they are booking profits where they can find good levels."

Dealers also said that while the credit disbursal and profit-taking pressure near year-end has significantly abated, some banks are likely to want to book profits at current levels. Traders are likely deploying the funds to advance their credit offtake and improve their net interest margins for their quarter-end and year-end earnings, they said.

Foreign portfolio investors also took profits after large purchases in recent days, which have helped push up bond prices. They sold fully accessible gilts amounting to INR 2.73 billion, Clearing Corp of India data at 1500 IST showed. In the week to Thursday, FPIs have bought gilts amounting to nearly INR 80 billion.

The marketwide turnover was INR 487.20 billion, lower than INR 693.85 billion at 1635 IST on Thursday, 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 6.60-6.68%.  (Vidhushi RajPurohit)

India Gilts: Off highs on profit booking after yields fall to 3-year lows

MUMBAI--1245 IST--Government bond prices were off highs as traders sold bonds at a profit after the yield on several gilts, including the 10-year benchmark, hit their lowest levels in three years, dealers said. Gilt prices remained up as traders bought bonds expecting prices to rise further should the Reserve Bank of India's Monetary Policy Committee cut the repo rate by 25 basis points in April and soften its policy stance.

Expectations of the latter have built up this week, and at the day's low, the 10-year gilt yield hit its lowest since Feb. 15, 2022. The 10-year yield is down over 7 bps this week as asset-liability managers look to lock in current yield levels, deploying funds after selling bonds to the RBI at its five open market operation auctions so far worth a total of INR 2 trillion. While banks have bought illiquid gilts for their 'held-to-maturity' books, traders have covered their short bets and picked up liquid securities. The five-year benchmark yield also hit its lowest level since Apr. 7, 2022.

"We are seeing replacement demand for OMO, and rate cut expectations are also there so everyone is buying something or the other, no one will want to miss out," a dealer at a private bank said. "Private banks were not able to sell much at OMO, so that demand is not coming from them and they are profit-booking." 

State-owned banks have replaced a majority of the bonds sold at the OMO auctions through higher-yielding state government securities, but said they could not let their portfolios skew too much and also picked up gilts. Some of the purchases were also for trading books, dealers said. Meanwhile, mutual funds likely turned sellers as their quarter-end redemptions drew nearer, after picking up long-term gilts earlier in the month, they said. 

Demand for longer-tenure bonds remained firm on bets the price appreciation of these bonds is likely to be greater even though short-term bond yields will fall more, dealers said. Traders have avoided trades in bonds maturing under five years since the February repo rate cut fearing tight liquidity conditions throughout March. However, with the RBI's liquidity infusion, conditions remain comfortable to place more aggressive bets on the April rate cut earlier than expected, dealers said.

With the last major tranche of tax outflows on Friday, and the RBI scheduled to infuse nearly INR 1.4 trillion of durable liquidity next week through gilt buys and a foreign exchange swap, dealers expect a rush to short-term bonds next week. The spread on 10-year gilt over the 5-year 6.75%, 2029 bond could rise to 20 bps from nearly 12 bps currently by end of March, they said.
 

The market-wide turnover was INR 363.95 billion, higher than INR 372.75 billion at 1230 IST on Thursday, 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 6.60-6.68%.  (Srijita Bose)

India Gilts: Up on bets of April MPC rate cut, softer stance

MUMBAI--1000 IST--Government bond prices were up as traders built up positions for another 25-basis-point repo rate cut in April, dealers said. Traders also expect the Reserve Bank of India's Monetary Policy Committee to change its stance to 'accommodative' from 'neutral' at its upcoming review to indicate a deeper rate-cut cycle and comfortable liquidity conditions, they said. 

Buying momentum picked up as banks shifted their focus to betting on a rate cut as their credit-disbursal and profit-booking targets for the year-end neared a close, dealers said. Traders also picked up gilts to replace the bonds sold at the RBI's open market gilt purchase auctions, they said.

"Market sentiments are positive, we could see the 10-year (benchmark 6.79%, 2034 bond yield) hit 6.62% anytime," a dealer at a state-owned bank said. "But there will be more demand on other tenures across the curve since people are still heavy on 10-year and they are getting good spreads on other bonds such as the 15-year (benchmark)." The yield spread on the 15-year benchmark 6.92%, 2039 bond over the 10-year benchmark has compressed to nearly 13 bps from 16 bps a month ago and traders expect the spread to compress by another 3 bps by the month-end, dealers said.

State-owned banks are likely to have remained on the buying side as they bulked up their bets on a rate cut, while private banks are likely to have sold bonds at a profit, dealers said. Traders expect the RBI's rate-setting panel to cut the repo rate by nearly 50 bps by December-end, but are waiting for liquidity conditions to ease and global uncertainties to play out before building up their bets on the same, they said. 

The marketwide turnover was INR 109.85 billion, higher than INR 206.45 billion at 1030 IST on Thursday, 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 6.60-6.68%.  (Srijita Bose)

India Gilts: Seen slightly higher on bets of April rate cut, softer stance

MUMBAI – Government bond prices are likely to open a tad higher as traders are expected to continue their positioning for the possibility of another 25-basis-point repo rate cut in April, dealers said. Dealers also expect the Reserve Bank of India to shift its gear towards a softer policy stance, which is likely to support the buying momentum. Gilt prices are also expected to be supported as the selling pressure to book profits for the current financial year ending Mar. 31 has abated, dealers said.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.60-6.67%, against 6.64% on Thursday. On Thursday, the yield on the 10-year benchmark gilt settled at its lowest level since Jan. 21, 2022. Some dealers were of the view that if the yield falls to 6.62%, stop-losses are likely to be triggered, causing the yield to fall to 6.60%.

Dealers across segments are expected to pick up gilts before the yields fall further. Traders widely expect the yield on the 6.79%, 2034 bond to fall to 6.60% by March-end as the market is heading closer to the next policy review. Meanwhile, dealers will continue to closely gauge evolving liquidity conditions in the banking system as a rate cut requires be comfortable funds with banks for it to transmit to the broader financial system.

Some traders expect the systemic liquidity to move to near neutral by the end of March on the back of inflows from the government's month-end spending and the RBI's consecutive measures to infuse both transient and durable liquidity into the banking system. Since January, the RBI has bought gilts worth INR 2 trillion so far, with another INR 500 billion worth of open market operation buy auction scheduled for Tuesday.

Banks are expected to replenish their holdings of bonds maturing in 8-15 years, the tenures they've sold the most to the RBI over the past two months, as well as stock up on these gilts before Tuesday's OMO auction, dealers said. Some traders also preferred buying higher-yielding state bonds over gilts to ensure the weighted average yields of their books were lucrative, dealers said. 

The rupee's appreciation over the last few days in the face of a weakening dollar index has also led to foreign portfolio investor inflows, which may continue on Friday. With the RBI not having to sell dollars to protect the domestic currency, rupee liquidity in the banking system has improved and the room the RBI's Monetary Policy Committee has to cut rates has also widened, dealers said. The domestic unit ended at a seven-week high of 86.3675 a dollar on Thursday, and may gain Friday as well. FPIs bought 29.06 billion of fully accessible securities on Thursday, data from CCIL showed, after the 10-year US Treasury yield fell 5 basis points from the previous day to 4.24% at 1700 IST Thursday. The benchmark US yield was little changed overnight. (Vidhushi RajPurohit)

End

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

Edited by Tanima Banerjee

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