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Informist, Thursday, May 22, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended sharply lower on Thursday as US Treasury yields rose near the close of trade after the US House of Representatives passed a spending bill that is expected to put fiscal strain on the world's largest economy. The bulk of the selling took place near the close of trade, with traders also cautious ahead of the weekly gilt auction and the likely surplus transfer by the Reserve Bank of India to the government on Friday.

The benchmark 10-year 6.79%, 2034 gilt closed at INR 103.62, or 6.27% yield, from INR 103.82, or 6.24% yield, Wednesday. The 6.33%, 2035 bond closed at INR 100.70, or 6.23% yield, from INR 100.91, or 6.21%, on Wednesday. Foreign banks and foreign portfolio investors were likely the largest sellers in the last hour of trade, dealers said.

Foreign portfolio investors sold INR 23.54 billion worth of fully accessible route gilts Thursday, Clearing Corp. of India data at 1925 IST showed. This would be the largest daily net sale since Apr. 9.

The yield on the 10-year US yield rose to the day's high of 4.62% by 1700 IST, after an overnight rise of 5 basis points to 4.59%, a level which persisted through the day. The bill, championed by President Donald Trump, includes tax cuts and is expected to add $4 trillion to the US fiscal deficit over 10 years, one of the reasons why Moody's Ratings downgraded the country's perfect credit rating of Aaa to Aa1 last week. A fall in the rupee to 86 a dollar for the first time since Apr. 11 also led to traders trimming their holdings, dealers said. 

"The market was reacting broadly to the US House passing the tax cut bill to the Senate, which also led to the paying in swaps (overnight indexed swap rates)", a dealer at a private bank said. "It happened around 1615 IST, and immediately after that, foreign banks were on the selling side." The 6.79%, 2034 bond was at INR 103.76 at 1615 IST, with an additional 14 paisa fall by the close of trade.

Mutual funds were also likely selling bonds maturing in 10 years and above, while remaining invested and even adding gilts maturing in less than five years, dealers said. Short-term instruments, both bonds and Treasury bills, have been in favour this week ahead of the expected bumper surplus transfer for 2024-25 (Apr-Mar). Domestic banks, both state-owned and private, have been buying gilts maturing in 2026 and 2027 to maintain their statutory liquidity ratio requirements.

"I had told you (in mid-April) the five-year had around 20 bps left to make," a dealer at a state-owned bank said. "That was when the five-year (6.75%, 2029 bond) was at 6.10%. We are now closer to there being no juice there. Now, you can extend duration a little bit if you have the room – there is a slight steepness in the 2030 segment that can offer value."

Optimism on the RBI surplus has already reflected in government bond prices over the past few days, with short-term bonds outperforming the 10-year gilt, dealers said. The market currently expects a record surplus transfer of INR 3 trillion or more, against INR 2.11 trillion a year ago and the Budget projection of INR 2.56 trillion for the RBI surplus and the dividends from state-owned banks. Informist had reported last week that the central bank's board would meet on Friday to decide on the surplus transfer.

The surplus payout may not immediately result in additional liquidity in the banking system, but by shoring up the government's cash buffers, it could lead to a cancellation of T-bill auctions or lower supply of the short-term debt instruments in Jul-Sept, dealers said. The government could also buy back bonds maturing up to 2027 to reduce its interest payments and bring down its repayment hump, a practice it revived in FY24 after several years. Gilt redemptions in FY27 total nearly INR 6.5 trillion, and this is after the government switched INR 373 billion worth of FY27 bonds bilaterally with the RBI earlier in May.

Traders who had aggressively bought the five-year benchmark 6.75%, 2029 gilt earlier this week booked profits ahead of the weekly gilt auction on Friday. The government will sell INR 150 billion of the 2029 gilt and INR 120 billion of the 7.09%, 2054 gilt at auction. Some primary dealers were also short-selling bonds to make room for the auction stock on Friday, dealers said.

Meanwhile, some traders were disappointed by the lack of discussion of a wider Liquidity Adjustment Facility corridor in the meeting of bankers and economists with the RBI on Wednesday. A large private bank sold both gilts and corporate bonds through the day in large quantities, which weighed on the market, especially with volumes dull due to a lack of fresh domestic cues, dealers said. Others remained hopeful that the RBI may introduce a temporarily asymmetric LAF corridor at the upcoming June monetary policy review.

The RBI's Monetary Policy Committee is widely expected to cut the repo rate by 25 basis points to 5.75% at its next meeting. Some banks have asked for the Standing Deposit Facility rate to be lowered to 50 bps below the repo rate from the current 25 bps. This would enable quicker transmission of the rate cuts to the broader economy as money market rates would fall, while also aiding banks' net interest margins, dealers said.

Informist reported Wednesday that bankers' suggestions on a new RBI liquidity management framework at the meeting included asking for more flexibility on the cash reserve ratio, though opinions were split on almost all issues. Bankers asked the RBI to continue with variable rate liquidity operations, but most asked for a change to overnight operations from the fortnightly ones that are currently the main tool in the liquidity management framework, and the introduction of a fixed rate repo window for a small percentage of banks' net demand and time liabilities. Some traders expect a draft circular on the new liquidity framework to be announced in June, with the RBI holding two meetings with banks on the issue since April.

The turnover in the gilts market was at INR 516.80 billion Thursday, nearly half of INR 988.75 billion Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the wholesale digital rupee pilot Thursday, against two trades worth INR 100 million the previous day.

OUTLOOK

On Friday, the overnight movement in US Treasury yields may lend cues at the open, though the impact of the offshore cue may be limited amid key domestic triggers later in the day. The government will sell INR 270 billion of two gilts at 1030-1130 IST. 

Demand for the 6.75%, 2029 bond is expected to be firm from state-owned banks and mutual funds, while the 7.09%, 2054 bond may be well bid by investors after its yield rose Thursday. Traders may avoid aggressive bets at the auction ahead of the announcement on the RBI surplus transfer to the government, which is expected Friday.

The surplus transfer is expected to be INR 2.5 trillion to INR 3.5 trillion and gilt prices may fall if the surplus transfer is at the lower end of the range, dealers said. The surplus transfer will add durable liquidity and shore up the government's fiscal situation. Traders also keenly await any change in the central bank's economic capital framework after the RBI board's review, likely to be announced Friday.

India's GDP growth estimates for Jan-Mar and for FY25, due on May 30, may be the next big trigger for gilts. Traders expect a print of 6.0-6.5%, against some economists' estimates of 6.8%, dealers said. The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.20-6.30% on Thursday, while the 6.33%, 2035 bond is seen at 6.18-6.28%

India Gilts: Tad dn as rupee falls; hopes of record RBI surplus limit losses

MUMBAI--1541 IST--Government bond prices were a little lower, tracking a fall in the rupee and a rise in US Treasury yields, dealers said. However, losses were limited as traders awaited the Reserve Bank of India's surplus transfer to the government, where the central bank is expected to announce a bumper transfer, they said. 

"Everyone is waiting for RBI's dividend for the next trigger, because the market is already pricing in around INR 3 trillion worth of transfer and is also expecting too much out of the MPC's (RBI's Monetary Policy Committee) June meet," a dealer at a state-owned bank said. "Yes, US yields are up and there is some pressure in the rupee, so some selling pressure is coming here (in gilts) also, but with so much pinned on domestic positives seen ahead, the market is holding onto these levels and not giving in."

Primary dealers likely sold bonds to make room for Friday's INR 270 billion auction, dealers said. Foreign banks and portfolio investors also likely sold gilts, dealers said, as the yield on the 10-year US Treasury note touched 4.60%, rising 6 basis points from Indian market close on Wednesday. The fall in the rupee to the day's low of 86.1050 to a dollar also led to a fall in gilts, dealers said. However, losses were limited as banks bought gilts while churning their portfolios for bonds maturing within 15 years to stay invested in gilts on hopes of record-high RBI surplus transfer and further rate cuts, they said.  

With expectations that a bumper surplus transfer to the government as well as a further 'bull-steepening' in the yield curve will push yields on shorter-tenure gilts further down, asset-liability managers continued to pick up bonds maturing in up to 10 years, including state bonds and Treasury bills, dealers said. Meanwhile, longer-tenure bonds maturing in more than 15 years continued to underperform on caution due to persisting uncertainty in the global economic outlook, which in turn has led to a fall in longer-duration bonds yields globally, they said. 

Volume in the market remained lower as traders awaited further cues to trade. Volume in the gilt market was INR 337.35 billion at 1530 IST, much lower than INR 748.10 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.22-6.26%.  (Srijita Bose)

India Gilts: In thin band; traders await RBI's surplus transfer Fri

MUMBAI–-1300 IST--Prices of government bonds moved in a thin band due to a dearth of incremental cues in the market, dealers said. Traders await any news on the Reserve Bank of India's surplus transfer to the central government, which the market widely expects to be announced Friday. Any news on this could result in sharp movement in gilt prices, dealers said. 

"There is mostly a wait mode in the market as everyone is waiting for the announcement of surplus figure," a dealer at a private sector bank said. "US yields are up but market will wait and see if it goes higher to 4.70% and then there could be a sell-off." 

The RBI's central board of directors is likely to meet Friday to discuss and approve the transfer of surplus to the Centre, Informist had reported earlier, citing two finance ministry officials. Traders expect the surplus to be around INR 3 trillion. The transfer would boost durable liquidity in the banking system and potentially lead to a reduction in the government's borrowing in the current financial year, dealers said.   

Prices were weighed down slightly by an overnight rise in US Treasury yields, dealers said. Some traders were also likely to be selling gilts to book profit after a sharp surge in gilt prices Wednesday. On Wednesday, the 10-year benchmark gilt closed at the lowest yield since October 2021.

Traders continued to prefer gilts maturing in up to seven years on expectations of a bull steepening--where yields on short-tenure gilts fall faster than yields on longer-tenure gilts, as the market widely expects the terminal repo rate to be 5.50%, against the current 6.00%. The prevailing geopolitical uncertainties have put downward pressure on longer-duration bonds globally, owing to which Indian long-term gilts also continued to underperform, dealers said. Traders were also buying state bonds mostly maturing in up to 10 years in the secondary market, according to Clearing Corp of India data as of 1130 IST.   

"It is actually a resilient picture that our long-term bonds are stable when globally yields on duration papers are rising," a dealer at another private sector bank said. "There should be more clarity in terms of global outlook for demand in these (longer-tenure gilts) papers to pick up."

Volume in the gilt market was INR 179.85 billion at 1230 IST, much lower than INR 456.40 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.22-6.26%. (Vidhushi RajPurohit)

India Gilts: Steady as traders eye surplus transfer; rise in US ylds weighs 

MUMBAI–-0932 IST--Prices of government bonds were broadly steady early Thursday as expectations of a high surplus transfer by the Reserve Bank of India to the government offset the impact of an overnight rise in US Treasury yields, dealers said. Some traders also sold gilts to book profits as the yield on the 10-year benchmark, 6.79%, 2034 gilt, closed below 6.25% Wednesday. Traders await the announcement of the RBI's surplus transfer to the government on Friday. 

State-owned banks continued to buy gilts to replace bonds sold to the RBI under its open market operation auctions, dealers said. Banks also bought gilts as they anticipated a higher surplus transfer of around INR 3 trillion from the RBI for 2024-25 (Apr-Mar), up from INR 2.10 trillion in FY24.

"The buying momentum from yesterday (Wednesday) is continuing. There are no fresh cues but the market is positive right now as they expect good surplus figure tomorrow," a dealer at a private sector bank said. 

Prices opened lower, tracking an overnight fall in US Treasury yields. The yield on the 10-year benchmark US Treasury note was 4.60% as of 0906 IST, up from 4.54% at the Indian market close Wednesday. US Treasury yields rose after poor demand at a $16-billion, 20-year Treasury bond auction Wednesday highlighted waning demand for US government debt.

"Market is maybe ignoring US yields because everything is looking positive domestically and US yields have been rising for a while now," a dealer at a state-owned bank said. "Some pressure can be there because of it (US yields), but everyone wants to hold now, so that is a support."

Volume in the gilt market was INR 114.40 billion at 0930 IST, sharply higher than INR 26.60 billion at the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.79%, 2034 gilt is seen within 6.22-6.26%. (Vidhushi RajPurohit)

India Gilts: Seen tad down on rise in US ylds; outcome of RBI-bks meet eyed

MUMBAI – Prices of government bonds are likely to open slightly lower Thursday, tracking an overnight rise in US Treasury yields, dealers said. Prices are likely to be supported during the day as traders expect a high surplus transfer by the Reserve Bank of India to the government, which is expected to be announced on Friday. 

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.22-6.26%. On Wednesday, the 10-year gilt ended at INR 103.82, or 6.24% yield. The yield on the 10-year US Treasury yield was at 4.59% at 0750 IST, up 5 basis points from the Indian market close on Wednesday. US Treasury yields rose after lacklustre demand at a $16-billion 20-year US Treasury bond auction Wednesday showed waning appetite for US government debt. Investors were also wary due to US President Donald Trump's effort to pass a tax-cut bill that is expected to further swell the US government's budget deficit.

Traders expect the RBI to transfer INR 2.50 trillion–INR 3.50 trillion to the government for 2024-25 (Apr-Mar), up from INR 2.10 trillion in FY24. This would provide a boost to durable liquidity in the banking system. 

Gilts maturing in up to five years are likely to continue being in demand as traders prefer the shorter end of the yield curve on expectations of further rate cuts, along with demand to replenish banks' 'held-to-maturity' books. Replacement demand is also largely centred in short-term gilts after the RBI's open market operation auctions to purchase gilts. The central bank has bought gilts worth around INR 4.84 trillion through open market operations auctions since January. 

Traders will await the outcome of the RBI's meeting with bank executives on Wednesday to discuss changes in the existing liquidity management framework. Bank officials recommended that the central bank return to its overnight liquidity management operations, and re-introduce fixed-rate repos and variable rate reverse repo auctions, attendees of the meeting told Informist on Wednesday. Bank officials also asked the central bank to reduce the daily maintenance level of the cash reserve ratio, they said.  (Vidhushi RajPurohit)

End

US$1 = INR 86.00

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

Edited by Saji George Titus

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