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Informist, Wednesday, Apr. 2, 2025

By Srijita Bose

MUMBAI – Government bond yields fell sharply across tenures to three-year lows as traders bulked up their rate cut and stance change bets, helped by liquidity conditions in the banking system returning to a surplus after over three months, dealers said. Investors who feared they were underinvested in gilts rushed to the market on the first trading day of the financial year in hopes of an easing monetary policy trajectory next week after the Reserve Bank of India announced INR 800 billion worth of gilt purchases through open market operation auctions in April.

The 10-year 6.79%, 2034 bond ended at INR 102.17, or 6.48% yield, against INR 101.45, or 6.58% Friday. The benchmark yield fell 10 basis points Wednesday, the most in a day since Oct. 4, 2022. It closed at its lowest level since Jan. 3, 2022, while the five-year benchmark gilt ended at 6.36%, the lowest since Mar. 31, 2022. 

Though the market was expecting the RBI's Monetary Policy Committee to cut the repo rate by 25 basis points to 6.00% next week, the surprise OMO announcement has cemented bets that the rate-setting panel will also change its stance to 'accommodative' from 'neutral'. The OMO quantum for April is double what the market was expecting. Traders had trimmed their gilt holdings at the year-end to book profits on bonds, preventing a fall in the 10-year gilt yield below 6.58% on Friday. As liquidity conditions eased in April, the benchmark yield came tumbling down.

"Such an aggressive rally is coming because of the surprise OMO auctions... US yields are down so some buying from foreign banks for FPIs (foreign portfolio investors) is also coming, " a dealer at a private bank said.

The yield on the 10-year US Treasury note fell to 4.15% during the day from 4.33% at 1700 IST on Friday. India's money markets were shut on Monday and Tuesday. Market participants are awaiting US President Donald Trump's announcement on reciprocal tariffs on Wednesday to gauge its impact on growth and inflation. However, foreign investors and banks picked up gilts as they expected reciprocal tariffs on India to be diluted and did not want to miss out on potential gains on domestic gilts, dealers said. Traders expect the 10-year gilt yield to fall to 6.45% before the RBI monetary policy announcement on Apr. 9

The 10-year gilt yield is now pricing in over 35 bps of rate cut by the end of December, dealers said. In a note Wednesday, Barclays said its base case was for a quarter percentage point rate cut but sees an outside chance of a 35-bps repo rate cut due to the downside risks to the central bank's growth and inflation forecasts.

Meanwhile, traders likely sold longer tenure gilts and state bonds to buy shorter tenure gilts maturing within 10 years, dealers said. "The longer tenure has already moved so much, there is no space left there, even though there will be good demand for state bonds at auction because of OMO replacement demand and smaller size (of state bond auctions)," a dealer at a state-owned bank said. "There is more space left in short-end still and liquidity is also a good support, so people are rushing there." However, state-owned banks were likely selling short-tenure gilts and picking up gilts maturing in 30 years to take advantage of the price appreciation when the yield falls, dealers said. They were looking to lock in better price appreciation per basis point move in yield due to the gilts' longer tenure, thereby dragging down yields on these bonds.

Traders also picked up gilts maturing within 10 years as the RBI included two shorter-tenure bonds to be sold at Thursday's OMO purchase auction, dealers said. Traders also picked up other bonds which the central bank has notified to buy, as they expect that the cut-off prices at the auction will not come at a deep discount from market levels, as most of these bonds will be sold out of banks' trading portfolios instead of their 'held-to-maturity' books, they said. The RBI has offered to buy--the 7.04%, 2029 bond, the 6.54%, 2032 bond, the 8.24%, 2033 bond, the 7.50%, 2034 bond, the 7.54%, 2036 bond, and the 7.23%, 2039 bond.

Heading closer to the MPC meeting, the yield spread on the 10-year benchmark over the five-year 6.75%, 2029 gilt has widened to more than 13 bps from 8 bps at the beginning of March. Traders were of the view that the yield spread of the 10-year gilt over the five-year gilt would steepen further by another 6-7 bps before the policy review next week and nearly 10-15 bps if the RBI's rate-setting panel signals a deeper rate-cutting cycle through a stance change, dealers said. 

Trade volumes on the secondary market rose sharply as traders positioned for policy outcome day on the first trading day of the financial year, dealers said. The market-wide turnover for the day was INR 1.02 trillion, almost double from INR 539.50 billion on Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There was no trade using the wholesale digital rupee pilot for the 14th consecutive day.

OUTLOOK

On Thursday, government bond prices may take cues from the movement in US Treasury yields after the US administration announces reciprocal tariffs on Wednesday. Traders may also assess further developments related to US tariff policy, dealers said.

Traders are likely to retain their bets on a repo rate cut and stance change by the RBI's MPC in April due to a lack of significant interest rate cues until the next review on Apr. 7-9, dealers said. 

Crude oil prices could also be a trigger for gilts if they move significantly, dealers said. A sharp movement of the rupee against the dollar could also provide cues. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.45-6.56% during the day.

India Gilts: Remain sharply up; traders bulk up rate cut bets before MPC meet

MUMBAI--1558 IST--Government bond prices remained sharply higher as traders bulked up their rate cut and stance change bets as liquidity in the banking system turned comfortable, dealers said. Traders were averse to selling gilts unless they were earning a significant profit on it, with the Monetary Policy Committee widely expected to cut the repo rate by another 25 basis points to 6.00% and change its stance to 'accommodative' next week.

"Selling pressure from PSUs (state-owned banks) are not there which has driven the market up," a dealer at a primary dealership said. "The 10-year (6.79%, 2034 gilt) yield is currently pricing two rate cuts now and more cuts will be dependent on whether there is a slowdown in the US economy."

In a note Wednesday, Barclays said its base case was for a quarter percentage point rate cut but sees an outside chance of a 35-bp repo rate cut due to the downside risks to the Reserve Bank of India's growth and inflation forecasts. Corporate institutions, mutual funds, life insurers and domestic banks were likely on the buying side at the beginning of the new financial year, dealers said. Buys from foreign investors were likely muted as traders await the reciprocal tariff announcement from the US, scheduled after market hours on Wednesday.

Traders likely sold longer tenure gilts and state bonds to buy shorter tenure gilts maturing within 10 years, dealers said. Traders expect the yield spread on the 10-year gilt over the five-year gilt to steepen further by another 10-15 bps if the RBI's rate-setting panel signals a deeper rate-cutting cycle through a stance change, dealers said. The spread of the 10-year benchmark yield over the five-year 6.75%, 2029 gilt's yield has widened to more than 13 bps from 8 bps at the beginning of March. Traders also picked up shorter tenure bonds backed by comfortable liquidity conditions, dealers said. 

The marketwide turnover was INR 876.50 billion at 1530 IST, sharply higher than INR 388.20 billion at the same time on Friday, 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 6.48-6.55%.  (Srijita Bose)

India Gilts: Up more; investors rush to mkt on liquidity comfort at FY-start

MUMBAI--1320 IST--Prices of government bonds rose further as investors who feared they were underinvested in gilts rushed to the market on the first trading day of the financial year as liquidity conditions turned comfortable, dealers said. Further, the Reserve Bank of India's announcement of liquidity infusion in April was seen as a precursor to a softer stance and rate cut next week.

Traders had already priced in a 25-basis-point cut in the repo rate by the RBI's Monetary Policy Committee at the end of its meeting on Apr. 9, but the expectation of a stance change was more split before Tuesday's announcement by the central bank to buy INR 800 billion worth of gilts in April. Bets on the stance change were amplified after the periodic liquidity tightness in March ended with a proxy for banking system liquidity showing a surplus for the first time since mid-December, dealers said.

"Liquidity conditions have moved to a high surplus, which was the major cue that the market was eyeing as now the chances of deeper rate cut has also strengthened," a dealer at a private bank said. "Market has rallied on the better liquidity, and we may see some more buying from here as there is no negative trigger for now." The net liquidity absorbed by the central bank - a proxy for the systemic liquidity surplus - was at INR 1.42 trillion on Tuesday, RBI data showed, the most since Nov. 18.

The yield on the 10-year benchmark gilt fell below 6.50% for the first time since Jan. 4, 2022. Traders across segments were picking up gilts as they expect the yield to drop further to 6.45-6.48% before the policy outcome. Private banks, primary dealerships, and overseas investors were likely to have been major buyers, dealers said.

Even as the 10-year benchmark bond was on track for its best day since Feb. 1, 2024, other traders booked profits as yields on the five- and 10-year benchmark gilts hit their lowest levels in over three years, dealers said. The yield on the five-year benchmark 6.75%, 2029 bond fell to 6.3616% at the day's low. 

State-owned banks were likely selling short-tenure gilts and picking up gilts maturing in 30 years to take advantage of the price appreciation when the yield falls, dealers said. They were looking to lock in better price appreciation per basis point move in yield due to its longer tenure. Demand from investors was also seen for the 7.34%, 2064 gilt, which led the yield on the gilt to fall to 6.88%, the lowest for a 40-year benchmark since the COVID-19 pandemic, dealers said. Mutual funds were also likely to have been active on the buying front as their month-end redemption pressure has passed, dealers said. 

The marketwide turnover was INR 619.25 billion, sharply higher than INR 313.00 billion at 1330 IST on Friday, 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 6.50-6.55%. (Vidhushi RajPurohit)

India Gilts: Surge as OMO notice cements Apr rate cut, stance change views

MUMBAI--0950 IST--Prices of government bonds were sharply up as traders stepped up their bets on a rate cut and also began positioning for a stance change by the Reserve Bank of India's Monetary Policy Committee next week, dealers said. Hopes for an easing policy trajectory were boosted after the central bank announced INR 800 billion worth of gilt purchases through four tranches of open market operation auctions for April. The yield on the 10-year benchmark, 6.79%, 2034 gilt fell to 6.51%, the lowest level the benchmark yield has hit since Jan. 5, 2022.

"RBI is clearly targeting the liquidity and wants it to consistently remain in surplus. It is a clear signal to the market that the liquidity stance will be changed to neutral," a dealer at a state-owned bank said. "The market was not expecting such a big measure so soon, when there are no major outflows lined up, it is therefore a move to bring some significant change to the liquidity management." The yield on the 6.92%, 2039 bond fell to 6.62%, the lowest level for a 15-year benchmark since Jun. 14, 2021.

The RBI's continuous measures led the liquidity to move from injection mode, prevalent since mid-December, to absorption mode on Saturday. The net liquidity absorbed by the central bank - a proxy for the systemic liquidity surplus - rose to INR 893.99 billion on Sunday, from INR 716.72 billion Saturday, RBI data showed. The systemic liquidity returned to a surplus after over three months. Easier liquidity conditions better transmit a fall in rate and make for more effective rate cuts, dealers said.

Traders are now looking forward to the upcoming meeting of the RBI with market participants on Thursday to review the current liquidity management framework and collect feedback on a new framework. The meeting is seen as a crucial one as it is scheduled before the three-day MPC meeting set for Apr. 7-9.

On the global front, the yield on the benchmark 10-year US Treasury note fell to 4.20% at 0800 IST from 4.33% Friday. US yields slid as investors assessed the potential impact of US President Trump's trade tariffs on the economy. Trump is set to announce reciprocal tariffs on US trade partners on Wednesday, which would go into effect immediately.

The market-wide turnover was INR 147.30 billion, higher than INR 67.15 billion at 0930 IST on Friday, 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 6.50-6.55%. (Vidhushi Rajpurohit)

India Gilts: Seen higher as RBI to buy INR 800 bln worth of gilts via OMOs

MUMBAI – Prices of government bonds are seen opening higher after the Reserve Bank of India on Tuesday announced four tranches of open market purchase of gilts through auction in April, for a total of INR 800 billion. A fall in US Treasury yields after soft manufacturing data in the US may also support the rise in gilt prices, dealers said.  

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.52-6.58%, compared with 6.58% on Friday. Money markets were closed on Monday on the occasion of Id-Ul-Fitr and on Tuesday due to banks' closing of accounts for 2024-25 (Apr-Mar).  

In a press release on Tuesday, the central bank announced four tranches of OMO purchases via auction, each for a notified quantum of INR 200 billion. The move comes even as the proxy for systemic liquidity conditions moved to surplus from a deficit for the first time since mid-December. The net liquidity absorbed by the central bank - a proxy for the systemic liquidity surplus - was at INR 893.99 billion on Sunday, RBI data showed. The RBI bought gilts worth INR 2.45 trillion in Jan-Mar via open market auctions. The announcement is seen furthering traders' bets of a rate cut by the RBI's Monetary Policy Committee next week, along with expectations of a stance change to 'accommodative' from 'neutral', dealers said. 

The central bank net bought government bonds worth INR 100 million outside open market operation auctions in the week ended Mar. 21, data released on Friday showed. This was the first week of central bank purchases through the secondary market since purchasing gilts amounting to INR 388.15 billion in January. 

On the global front, the yield on the benchmark 10-year US Treasury note fell to 4.20% at 0800 IST from 4.33% Friday. US yields slid as investors assessed the potential impact of US President Trump's trade tariffs on the economy. Trump is set to announce reciprocal tariffs on US trade partners on Wednesday, which would go into effect immediately. The slide in US yields was furthered as manufacturing data in the US showed factory activity shrinking in March, while job openings for February also missed forecasts. Caution ahead of Trump's tariff announcement may cap gains in gilt prices nearing the end of trading hours, dealers said. 

The RBI Tuesday said states' borrowing for this quarter is expected to be INR 2.73 trillion. The quantum is slightly higher than traders' estimate of INR 2.50 trillion. However, the actual borrowing could undershoot the target, dealers said. Six states will aim to raise INR 118 billion on Thursday. The low quantum may see spreads between state bonds and gilts further narrow at Thursday's auction. The yield spread on the best-performing 10-year state bond over the 10-year benchmark gilt narrowed to 37 bps at the last state bond auction of the year on Mar. 25 from nearly 60 bps earlier last month. (Cassandra Carvalho)

End

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

Edited by Saji George Titus

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