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Informist, Monday, May 26, 2025

By Cassandra Carvalho and Aaryan Khanna

MUMBAI – Prices of government bonds ended steady across most tenures Monday, erasing the day's gains on profit-booking, dealers said. Bond prices had recovered early losses as traders purchased gilts betting on a rate cut of 25 basis points by the Reserve Bank of India's Monetary Policy Committee in June, and another 25 bps cut in the remainder of 2025. 

Traders who purchased gilts earlier in the day, when prices fell, likely booked profits nearing the end of trade, dealers said. Dealers said that state-owned banks were purchasing gilts at market open, but churned portfolios later in the day.

"This is intraday profit taking," a dealer at a private sector bank said. "Whoever was buying in the morning is making a profit now."  

"It could be this was some individual's mandate to book profit, but we didn't see any heavy purchases from any particular entity earlier in the day," a dealer at a state-owned bank said. 

The benchmark 10-year 6.79%, 2034 gilt closed at INR 103.75, or 6.25% yield, Monday against INR 103.76, or 6.25% yield, Friday. The 6.33%, 2035 bond closed at INR 100.92, or 6.20% yield, from INR 100.87, or 6.21%, on Friday.

Bond prices opened lower after the central bank announced a lower-than-expected transfer of surplus to the central government for 2024-25 (Apr-Mar) Friday. The transfer of INR 2.69 trillion was a record high, but most traders had expected a transfer of INR 3.00 trillion. 

However, bond prices recovered losses as traders shifted their focus to the MPC's meeting next month, the decision of which will be announced on Jun. 6. Bond traders had digested the surplus figure over the weekend, since the release came post market hours Friday, they said. 

Bonds have already priced in a 25-basis-point cut in June, and some traders speculated that it could be also be a 50 bps cut. Traders preferred short-term gilts, maturing in upto 5 years, on expectations that the gilt yield curve would steepen further in a rate cut cycle. Ample liquidity in the banking system also aided the rise in bond prices. On Sunday, the RBI had net absorbed INR 1.71 trillion, largely unchanged from Saturday, the central bank data showed.

Deposit Insurance and Credit Guarantee Corporation was also purchasing gilts in the secondary market Monday, ahead of its collection of premiums expected this week, a dealer said. The specialised division of the central bank is also expected to participate at the weekly gilt auction Friday, especially due to its preference for papers maturing in 10-14 years, dealers said. 

Foreign and private sector banks were likely buyers later in the day, dealers said. Foreign banks were under-invested in government bonds this month, after escalation in tensions between India and Pakistan and a grim outlook on fiscal health and growth in the US, dealers said. 

Traders speculated that the central bank could announce a slew of open market operation purchase auctions after the MPC's meeting in June. Traders estimate a notified amount of INR 500 billion to INR 1.00 trillion. Some traders expect the RBI to continue with OMO auctions after the June policy review to make up for liquidity drain from its foreign exchange operations.

The settlement of the short sales in its forward book, of $64.25 billion within FY26, are set to drain systemic liquidity by nearly INR 5.50 trillion if the central bank takes delivery. Though it may rollover some of its forwards, traders expect the RBI would want to draw down the book and instead buy gilts to shift the liquidity exposure from the offshore part of its balance sheet to the domestic side. Bond yields could fall by 5-10 basis points if OMO auctions are announced, dealers said.

Traders await the release of India's GDP growth estimates for Jan-Mar and for 2024-25 (Apr-Mar), due Friday. Dealers have varied expectations, with some betting on a Jan-Mar print as low as 6.00%, while others estimate a 7.00% reading. An Informist poll estimated the Jan-Mar reading at 6.80%. 

Dealers who expect a print of 6.20-6.50% said bond yields could rise by 4-5 bps if the data printed at 6.80%. Dealers who expected a reading of 6.80% and above said spending on account of the Kumbh Mela held in Jan-Feb could contribute to higher growth.

OUTLOOK ON 2035 BOND 

At the weekly gilt auction Friday, the government will sell INR 60 billion of the 6.64%, 2027 gilt and INR 300 billion of the 6.33%, 2035 gilt. This will be the 2035 gilt's second auction, after which, dealers said they may consider the 2035 gilt to be the benchmark proper next week, as its trade volumes are expected to nearly match the older gilt after fresh supply this week, they said. Traders expect the 2035 gilt yield to hit 6.10% by Jun. 6.

Some banks have begun pricing spread assets, such as state bonds, against the newer 10-year 6.33%, 2035 note, even as the bulk of trade volumes continue to remain in the 6.79%, 2034 bond. The 2034 bond is still considered the benchmark for now as its trade volumes are four times the next closest bond's – the 6.33%, 2035 gilt. Traders said the newer gilt was still illiquid during times when the market moved sharply, like on Thursday, and their ability to short sell the gilt to manage risk was limited with its INR 300 billion outstanding and lack of wide availability.

"It is not an unusual thing to see pricing move to the new bond, especially since the auctions have become more spread out and a large supply hits the market together," a chief dealer at a state-owned bank said. The 10-year gilt is slated for auction only once every four weeks in Apr-Sept, after being auctioned fortnightly in FY24. "Moreover, a lot of investors will look at the maturity date, and because the calendar years have changed, they prefer the 2035 bond to allot as the 10-year benchmark."

The turnover in the gilts market was at INR 531.95 billion Monday, slightly lower than INR 574.10 billion Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the wholesale digital rupee pilot Monday, same as the previous day.

OUTLOOK

On Tuesday, bond prices are likely to open steady, dealers said. US markets were shut Monday for Memorial Day. Traders may continue to position for a rate cut at the MPC's meeting in June, and preference for short-term gilts is expected to continue. Traders also await India's GDP growth estimates for Jan-Mar and for FY25, due on Friday.

Gilts may also take cues from the result of weekly state bond auction. Ten states will raise INR 158.00 billion through bonds Tuesday. The spread between 10-year state bonds and the 10-year gilt is expected to be between 35 bps and 40 bps at the auction, dealers said. Traders are likely to pick up short-term state bonds, with demand for these securities robust in the secondary market.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.20-6.28% on Tuesday, while the 6.33%, 2035 bond is seen at 6.18-6.22%

India Gilts: Remain up; short-term gilts preferred on firm rate-cut bets

MUMBAI--1523 IST--Prices of government bonds remained up on firm expectations of at least a 25-basis-point cut in the policy repo rate at the Reserve Bank of India's Monetary Policy Committee meeting in June, dealers said. Some traders also speculated that the MPC could opt for a 50-bps cut in June, but that would depend on the GDP growth figure for Jan-Mar, they said. Traders continue to prefer gilts maturing in up to five years as they expect further steepening of the yield curve. 

The statistics ministry will publish India's GDP growth for Jan-Mar and provisional annual estimate for 2024-25 (Apr-Mar) on Friday. An Informist poll estimated the Jan-Mar figure at 6.80%. Most traders expect a print of 6.2-6.5%, and see a rise of 4-5 bps in the yield of the 10-year benchmark 6.79%, 2034 gilt if the data prints at 6.8%. However, some traders expect a print of 6.5-6.8%, due to strong spending on account of the Kumbh mela held in Jan-Feb. 

Foreign and private sector banks were likely purchasing gilts, dealers said. "We were expecting a sell-off in gilts, especially in short-term today (Monday)," a dealer at a private sector bank said. "But it looks like market is willing to buy at any dip and comfortable liquidity is also supporting it."

Short-term bonds remained in favour, but traders said the "bull steepening" of the yield curve--wherein short-term yields fall greater than their long-term counterparts--will only sustain until the MPC decision on Jun. 6. RBI Governor Sanjay Malhotra's policy statement will provide clarity on whether short-term bond prices continue their recent rise, dealers said. 

Traders expect the 10-year benchmark, 6.79%, 2034 gilt's yield to fall to 6.20% by May-end and if the RBI's MPC does cut the repo rate, the yield will likely fall to 6.15% after the June meeting. The yield on the 6.33%, 2035 bond--which is expected to become the 10-year benchmark after its auction this week--is likely to fall to 6.10% as the government's spending of the RBI surplus adds further liquidity into the banking system.

Volume in the gilt market was INR 425.55 billion at 1530 IST, slightly lower than INR 470.70 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 10-year benchmark 6.79%, 2034 gilt is seen at 6.22-6.26%. (Cassandra Carvalho)

India Gilts: Reverse losses on hopes of another 50 bps rate cuts in 2025

MUMBAI--1230 IST--Prices of government bonds reversed all losses as traders bought gilts with expectation of a repo rate of 5.50% by the end of 2025, dealers said. Short-term gilts, maturing within five years remained most in favour as traders see the yield cuve steepening on the back of rate cut views and expectation of an increase in surplus liquidity in the banking system. Gilt prices were down at market open as the Reserve Bank of India's surplus transfer to the central government for 2024-25 (Apr-Mar) fell short of the market expectations, dealers said. 

"The dividend was low when we compare it with what traders were expecting but it is still a record high transfer so market has recovered from the initial sell-off," a dealer at a state-owned bank said. "And now policy meet is 10 days away and things are looking positive in that front."

The RBI's Monetary Policy Committee will start its three-day policy meeting on Jun. 4. Market participants are widely expecting the MPC to cut the repo rate by another 25 basis points to 5.75% in June. At the current yield level of 6.24% on the 10-year benchmark, 6.79%, 2034 gilt traders have already priced in the June rate cut, dealers said. They expect the gilt's yield to fall to 6.20% by May-end and if the RBI does cut the repo rate, the yield will likely fall to 6.15% after the June meeting. 

Short-tenure gilts remained in favour, as traders expect a "bull steepening" in the yield curve--the yield on short-tenure papers will fall greater than long-tenure bonds--on hope of further rate cuts, dealers said. The yield spread of the 10-year benchmark 6.79%, 2034 over the five-year 6.75%, 2029 bond has widened to nearly 41 bps from over 26 bps at the start of the month.

"Yields will fall more so now is a good time to hold on to positions and, therefore, we saw the immediate reversal in prices and buying kicked in," a dealer at another state-owned bank said.

Post market hours Friday, RBI announced a record surplus transfer of INR 2.69 trillion to the central government for FY25. Traders were expecting the figure at around INR 3 trillion, which led to some disappointment and gilt prices opened sharply lower. However, views of further rate cuts offset the trigger, dealers said. 

A lower-than-expected surplus transfer could lead the RBI to conduct more open market operation auctions to purchase gilts to inject additional liquidity into the banking system, dealers said. However, traders expect any such announcement by the RBI only after the MPC's decision in June, they said. Some dealers pegged the quantum for OMO auctions around INR 500 billion. 

Volume in the gilt market was INR 307.45 billion at 1230 IST, slightly higher than INR 284.90 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 10-year benchmark 6.79%, 2034 gilt is seen at 6.22-6.28%. (Vidhushi RajPurohit)

India Gilts: Dn as RBI surplus lower than expected; rate cut view limits loss

MUMBAI--0920 IST--Prices of government bonds were down Monday as the Reserve Bank of India's surplus transfer to the central government Friday was lower than expected, dealers said. Losses were limited as some traders brought gilts on hope of further repo rate cuts in 2025, they said.  

"The impact of dividend will not be that sharp because now market will look forward to rate cut," a dealer at a private bank said. "Those who had aggressive positions for rate cut could sell some of their holdings but overall, there does not seem much downward movement from here."

Post market hours Friday, RBI announced a record surplus transfer of INR 2.69 trillion to the Centre for 2024-25 (Apr-Mar). Traders were expecting the figure at around INR 3 trillion. 

Following the announcement, gilt prices opened sharply lower but reversed some of the losses as traders continued to position for at least two more cuts of 25 basis points each in the repo rate in the remainder of 2025, dealers said. Some traders were also of the view that a lower surplus transfer could lead the RBI to conduct more open market operation auctions to purchase gilts to infuse more durable liquidity into the banking system. On Friday, the net liquidity abosrbed by the RBI from the banking system was INR 1.70 trillion and the durable liquidity as on May 2 was at INR 2.35 trillion, RBI data showed. Since January, the RBI has bought gilts amounting to INR 4.84 trillion through OMO auctions.

Volume in the gilt market was INR 41.15 billion at 0920 IST, lower than INR 62.50 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 10-year benchmark 6.79%, 2034 gilt is seen within 6.24-6.28%. (Vidhushi RajPurohit)

India Gilts: Seen down as RBI's surplus transfer lower than expected

MUMBAI – Prices of government bonds are likely to open lower Monday after the Reserve Bank of India's surplus transfer to the central government Friday fell short of the market's expectations, dealers said. The increase in the band for the Contingent Risk Buffer is also expected to weigh on gilt prices. Offshore cues will be limited as markets in the US are shut on account of Memorial day.

The yield on the 10-year benchmark 6.79%, 2034 bond is seen at 6.24-6.30%. On Friday, the 10-year gilt ended at INR 103.76, or 6.25% yield. Post market hours Friday, RBI announced a record surplus transfer of INR 2.69 trillion to the Centre for 2024-25 (Apr-Mar). The RBI had transferred INR 2.11 trillion to the government in FY24. The gilt market had positioned for INR 3 trillion of transfer. The actual figure was near the lower end of the market's expectation of INR 2.5 trillion to INR 3.5 trillion.

A lower-than-expected figure dampened traders' hope of a potential borrowing cut or a gilts buyback announcement, dealers said. This is expected to lead to a sell-off in gilt market Monday. The RBI also scaled up the upper limit of the Contingent Risk Buffer to 7.5% from 6.5% earlier. 

"It is just the surplus transfer, rate-cut view is not impacted. So, at open we'll see some fall (in gilt prices) but buying will come during the day and we can see some support there," a dealer at a primary dealership said.   

The fall in gilt prices is likely to be limited as the market's expectations of another 50 basis points of cut in the repo rate remained intact, dealers said. The record surplus is also expected to give a boost to systemic liquidity, which will in turn smoothen the transmission of further policy rate cuts to the wider financial system, they said.

"We expect the impact (of surplus transfer) to be visible on system liquidity over a few months - June-end to August-end. System liquidity which is currently averaging at INR 1.6 trillion or 0.7% of NDTL (Net Demand and Time Liabilities) in May 2025, could rise to around INR 5 trillion (2% of NDTL) by August-end. The governor had indicated that sufficient level of liquidity surplus needed for transmission is 1% of NDTL," Gaura Sen Gupta, chief economist at IDFC First Bank Economics Research, said in note Friday.

Expectations of a rate cut and improvement in systemic liquidity are likely to keep short-tenure gilts relatively supported, dealers said. Long-term gilts are likely to be weighed down the most, they said. (Vidhushi RajPurohit)

End

US$1 = INR 85.09

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

Edited by Deepshikha Bhardwaj

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