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Informist, Tuesday, Apr. 22, 2025

By Srijita Bose

MUMBAI – Government bond prices ended largely steady on Tuesday, erasing most losses for the day due to buying by foreign banks and insurers as hopes of further rate cuts by the RBI's Monetary Policy Committee remained intact. Gilt prices were lower throughout most of the day after the Reserve Bank of India revised down the additional run-off factor for internet and mobile banking-enabled retail deposits of banks to 2.5% from 5% in the draft liquidity coverage norms, dealers said.

The 10-year benchmark 6.79%, 2034 bond ended at INR 103.30, marginally lower than INR 103.33 on Monday. The bond closed at a yield of 6.32%, unchanged from Monday.

"Rate view remains positive, so even though LCR norms will reduce some of the demand, short end (of the yield curve) still looks good on rate cut views," a dealer at a private sector bank said. "Today (Tuesday), banks would have sold short-term and gone for mid- to long-tenures, but others such as mutual funds and FPIs (foreign portfolio investors) were there to buy these bonds."

Bond prices, especially those of liquid gilts, fell sharply early Tuesday in response to the final liquidity coverage ratio norms the RBI released late on Monday. Though prices of short-term gilts were expected to fall more than most tenures in response to the final norms, these moved in tandem with the 10-year benchmark gilt. This was because the yield curve is expected to steepen further on rate-cut bets, dealers said. Mutual funds and FPIs are likely to have bought gilts maturing within seven years, offsetting some of the fall in prices of these bonds, dealers said.

State-owned banks sold shorter-tenure gilts maturing in up to five years due to the revised LCR norms. State-owned banks generally have a higher share of retail deposits, and will now have to set aside a lower share of liquid gilts towards this norm. However, some dealers said that due to earlier reports that the RBI would implement the revised norms in a staggered way, banks had already limited shoring up of these gilts for LCR provisioning. This is likely to have led to a limited sell-off of these bonds during the day.

The recovery in gilt prices was led by longer-tenure gilts maturing in over 30 years, which rose on demand from insurers and pension funds, dealers said. Traders are also likely to have picked up longer-tenure bonds as the yield spreads of these bonds over the 10-year benchmark gilt have widened significantly, which made these attractive to buy. The yield spread of the 7.34%, 2064 gilt over the 6.79%, 2034 bond widened to nearly 47 basis points from 36 bps at the end of March. Moreover, long-term investors were also seen asking for 30-50-year papers for bond-forward rate agreements on Tuesday, and this increased the demand for these bonds, dealers said.

Demand from banks, primarily state-owned banks, came in the latter part of the day, after selling INR 200 billion worth of gilts at the RBI's open market operations auction, dealers said. At the OMO auction, state-owned banks were aggressive bidders for all the bonds the RBI had offered to buy, which led to lower-than-estimated cut-off prices. Dealers said a large state-owned bank had higher stock of the 6.10%, 2031 bond, which was sold the most at the auction at a deeper-than-expected discount to prevailing market prices. 

Though cut-off prices at the OMO auction were much lower than expectations, gilt prices did not react. "Yes, the cut-offs were poorer, but it has happened before and not much of a surprise now," a dealer at another private bank said. "And this will continue to happen if RBI keeps bringing in new bonds at every OMO auction." The RBI had offered to buy the 6.10%, 2031; the 8.30%, 2040; and the 9.23%, 2043 bonds for the first time in an OMO auction, but the quantum of the 2040 and the 2043 bonds sold at the auction was much lower as banks did not have much stock of these bonds, dealers said. 

Meanwhile, at the INR 108.70-billion state bond auction, banks and insurers alike bid for the bonds, dealers said. The cut-off yields were mostly in line with expectations. Banks also picked up state bonds maturing in 2040-2045 in the secondary market to replenish these in place of bonds sold at the OMO auction, dealers said. 

The turnover in the gilts market was INR 962.70 billion on Tuesday, slightly higher than the turnover of INR 918.20 billion on Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades made via the wholesale digital rupee pilot, whereas there was a single trade through this method worth INR 150 million in the 7.38%, 2027 gilt on Monday.

OUTLOOK

On Wednesday, government bond prices are seen a little lower as banks may continue to sell liquid gilts maturing in up to 10 years after the revised LCR guidelines, dealers said. The fall in prices could be limited as investors will look to buy gilts as hopes of further rate cuts by the RBI's rate-setting panel persist.

Any sharp movement in US Treasury yields could also lead to movement in gilt prices. However, even as uncertainty on trade and tariffs by President Donald Trump persists, gilt prices are expected to follow domestic triggers as conditions for rate cuts remain positive, dealers said. India's provisional GDP growth estimates for Jan-Mar and 2024-25 (Apr-Mar), due at the end of May, will be the next major triggers for gilts.

Some dealers see bond yields rising slightly, as traders take out profits and investors look to purchase gilts at higher yields, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.28-6.38% on Wednesday.

India Gilts: Long-term bonds surge as 40-year spread over 10-year rises to 47 bps

MUMBAI--1548 IST--Government bond prices were off highs on likely buying by foreign banks, dealers said. Despite the lower-than-expected cut-off prices at the Reserve Bank of India's INR-200-billion purchase of gilts through an open market operations auction, gilt prices recovered some of the losses, led by a rise in longer-tenure bonds, dealers said. 

Longer-tenure gilts maturing over 30 years rose on demand from insurers and pension funds, dealers said. Traders are also likely to have picked up these bonds as the yield spread of the 40-year benchmark gilt over the 10-year benchmark gilt widened significantly, making it an attractive buy. The yield spread of the 7.34%, 2064 gilt over the 6.79%, 2034 bond widened to 47 basis points from 36 bps at the end of March. 

Demand from state-owned banks for shorter-tenure gilts maturing up to five years fell after the revised liquidity coverage ratio guidelines were released by the central bank Monday, which lowered the run-off factor for internet and mobile banking-enabled retail deposits to 2.5% from 5% in the draft guidelines. State-owned banks, which have a higher share of retail deposits, will now have to set aside a lower share of liquid gilts towards this norm. This led to a fall in prices of gilts maturing up to 15 years, which banks generally stock for their asset-liability management books, dealers said. Mutual funds and foreign portfolio investors likely bought shorter-tenure gilts, offsetting some of the fall in prices of these bonds, they said. 

"The market has already given in due to LCR norms, and the OMO auction results were not so much different to what had been seen at earlier auctions," a dealer at a state-owned bank said. "It was mostly PSUs (state-owned banks) who bid aggressively at OMO (auction), so some replacement demand is coming from them... but even though I am expecting some correction here because market has already rallied so much earlier, rate cut view remains positive, and we are not seeing as much of a sell-off."

At the OMO auction, state-owned banks aggressively tendered all the bonds the RBI had offered to buy, and this led to cut-off prices being lower than estimated in an Informist poll. The 6.10%, 2031 bond was sold the most, with one large state-owned bank with a higher stock of the bond tendering at deeper than expected discounts, dealers said. 

The turnover in the gilt market was INR 678.35 billion at 1530 IST, slightly higher than INR 672.60 billion at the same time Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.30-6.36%.  (Srijita Bose)

India Gilts: Remain dn; traders await OMO auction result for further cues

MUMBAI--1227 IST--Prices of government bonds remained down Tuesday as traders awaited the result of the Reserve Bank of India's INR-200-billion purchase of gilts via auction under its open market operations, for further cues, dealers said. 

"If the OMO result (is) at market or at least near market, we can see some recovery in secondary," a dealer at a state-owned bank said. "Because then, traders will buy in secondary just to sell at auction at a profit. But if it's again at a deep discount, there will be further sell-off." The 10-year benchmark gilt yield is seen rising by 1-2 basis points if cut-off prices at the auction are set sharply below those indicated by Financial Benchmarks India Pvt. Ltd.

Bond prices have been little changed after the results of the past few OMO auctions have been published. This was even on occasions when the cut-off prices varied sharply from traders' views. At the auction Tuesday, the long-term 9.23%, 2043 and the 8.30%, 2040 gilts are seen being sold at prices sharply lower than the benchmark prices, while the other gilts are seen being sold around 10-20 paise below indicative prices. The largest bid numbers and highest cut-off prices are expected for the 6.10%, 2031 gilt due to its short-term maturity, and because it has been offered for purchase for the first time by the RBI. 

After the central bank released the amendments to its liquidity coverage ratio framework Monday, bond prices, especially those of liquid gilts, fell sharply. Prices of short-term gilts, which were expected to fall more than most tenures, moved in tandem with those of other tenures. This was likely since the yield curve is expected to steepen further on rate cut bets.

The outlook on rate cuts by the Reserve Bank of India's Monetary Policy Committee has remained intact. Traders still bet on the 10-year benchmark gilt yield falling to 6.25% before the next MPC meeting in June, and would prefer short-term gilts whose yields are more sensitive to rate changes, dealers said.

Additionally, the revised LCR guidelines are expected to boost the liquidity surplus. A strong liquidity surplus in the banking system was another reason why traders prefer short-term gilts. Banks' asset and liability managers have begun readjusting their portfolios after the guidelines, but major changes are expected only in the course of the next six months as the new norms take effect only from Apr. 1, 2026, dealers said. 

Volumes in the gilt market were INR 380.85 billion at 1230 IST, slightly higher than INR 326.05 billion at the same time Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.28-6.36%.  (Cassandra Carvalho)

India Gilts: Down; demand for short-term seen less after revised LCR norms

MUMBAI--0949 IST--Prices of government bonds were down after the Reserve Bank of India revised the liquidity coverage norms to an extra 2.5% run-off for bank's internet and mobile banking-enabled deposits, from an extra 5% run-off prescribed in the draft norms earlier, dealers said. 

"This is mostly traders' instant response to the LCR norms. 10-year is a trading paper so it shows the most reaction. Balance sheet managers are likely to make their decision a little later but for now the change is reflecting in trading papers," a dealer at a private sector bank said. As of 0949 IST, the benchmark 10-year 6.79%, 2034 gilt was down 15 paise, while the benchmark five-year 6.75%, 2029 gilt was down 11 paise. 

Bond prices may recover losses by the end of the day, as traders remain optimistic of a deeper rate cut cycle in 2025, dealers said. Preference for gilts maturing in upto five years is likely to decrease. However, the losses in these papers are likely to be limited since banks usually store these gilts for asset and liability management purposes, and are not traded frequently.

Recently, traders have preferred short-term gilts on expectations of a deeper rate cut cycle by the RBI's Monetary Policy Committee, with expectations of at least another 50 basis points of cuts in the remainder of 2025. Traders have been shifting to gilts maturing in 7 years or more, with some preferring the 'belly' of the yield curve—papers maturing in 10-15 years--for their greater capital appreciation in these bonds with a per basis fall in yields.    

Traders await the results of the central bank's INR-200-billion open market operations auction to purchase gilts and the INR-108.70-billion state bond auction for further cues, dealers said. Volumes in the gilt market were INR 143.10 billion at 0930 IST, higher than INR 94.55 billion at the same time on Monday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, the yield on the 6.79%, 2034 bond is seen at 6.28-6.36%.  (Cassandra Carvalho)

India Gilts: Seen steady before OMO, state bond auction

MUMBAI – Prices of government bonds are likely to open steady on Tuesday ahead of the Reserve Bank of India's INR 200-billion open market operations auction to purchase gilts and the INR 108.70-billion state bond auction, dealers said. Results of both auctions will drive gilt prices. Gilt prices will also depend on traders' assessment of the RBI's amendments to the Liquidity Coverage Ratio framework, announced after market hours on Monday.

The yield on the 10-year benchmark, 6.79%, 2034 bond, is seen at 6.28-6.35% for the day. On Monday, the 10-year gilt ended at INR 103.33, or 6.32% yield, the lowest closing level since Nov. 9, 2021. Traders expect the first half of the day to be concentrated on the two auctions, with the results seen dictating the trajectory of prices for the rest of the day, dealers said. At the OMO auction at 0930-1030 IST, the central bank has offered to buy five gilts – the 6.10%, 2031; the 7.26%, 2032; the 7.50%, 2034; the 8.30%, 2040; and the 9.23%, 2043 gilts.

The 6.10%, 2031; the 8.30%, 2040; and the 9.23%, 2043 bonds are likely to be tendered the most as this is the first time the central bank has offered to buy these at an OMO auction this year. Among these, the 6.10%, 2031 bond with the highest outstanding of INR 1.52 trillion is expected to be tendered the most by banks, which may lead to its cut-off price being set at a discount to Monday's indicated valuation by Financial Benchmarks India Pvt Ltd, dealers said. 

After market hours on Monday, the RBI said banks would need to maintain 2.5% run-off factor for internet- and mobile banking-enabled retail deposits, revising downwards the July 2024 guidelines that had proposed a 5% run-off factor. Some traders are likely to sell short-term bonds as the requirement for these bonds will ease after the announcement, dealers said. The new directions will come into effect from Apr. 1, 2026. Traders are also of the view that as yields fall across tenures on expectations of further policy easing, interest in bonds maturing in 10–15 years is seen strong. Some also expect greater interest in long-tenure bonds due to greater capital appreciation in these bonds with a per basis fall in yields. 

Gilt prices are expected to remain higher as the market widely expects the RBI's Monetary Policy Committee to cut policy rates by another 25 basis points at its meeting in June. However, during the day, the rise in gilt prices is likely to be capped as some traders will book profits after the yield on the 10-year benchmark gilt dropped by 5 bps Monday due to expectations of a rate cut.  (Vidhushi RajPurohit)

End

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

Edited by Avishek Dutta

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