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Informist, Thursday, Jun. 5, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended higher as traders placed last-minute bets ahead of the outcome of the Reserve Bank of India's Monetary Policy Committee meeting Friday. Bonds have already priced in a 25 basis point cut in the repo rate by the rate-setting panel. RBI Governor Sanjay Malhotra will announce the outcome of the three-day meeting at 1000 IST Friday.

The panel is widely expected to cut the policy repo rate by 25 bps and revise down its inflation forecasts, though some traders expect a 50 bps cut. There is also an expectation that the RBI will widen the Liquidity Adjustment Facility corridor by reducing the Standing Deposit Facility rate by an additional 25 bps.  

Currently, the width of the Liquidity Adjustment Facility corridor is 50 bps, with the Standing Deposit Facility acting as the floor at 5.75% and Marginal Standing Facility as the ceiling at 6.25% and repo rate at the mid-point. Should the framework be asymmetrically widened at the lower end, the corridor would stand at 5.25-6.00% if the repo rate is cut to 5.75%.

"There is nothing happening in the market today (Thursday)," a dealer at a state-owned bank said. "At least now, after lunch, and after the very good cut-offs (prices) at buyback (auction), traders are positioning before the MPC, for a widening of the SDF (from repo)."

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.98, or 6.20% yield, compared with INR 100.90, or 6.21% yield at close Wednesday. The most-traded bond 6.79%, 2034 bond closed at INR 103.79, or 6.25%, compared with INR 103.71, or 6.26% Wednesday.

Traders expect bond yields to fall by around 10 bps if the MPC decides on a 50 bps rate cut. However, the yields are seen rising by 5-10 bps if the central bank delivers only a 25-bps cut, without revising downwards its inflation and growth estimates or adjusting the liquidity framework. 

Traders expect the central bank to lower its inflation estimate for 2025-26 (Apr-Mar) by 20-30 bps. In its April policy, the RBI had projected the average inflation in FY26 at 4.0%. Traders also expect the RBI to cut its GDP growth forecast for FY26 to 6.2% from 6.5%. Traders expect the committee's decisions to be unanimous and will pay close attention to the tone of Malhotra's commentary.  

Though traders were earlier expecting the RBI to announce a calendar of open market gilt purchases through auctions or a 25 bps cut in the cash reserve ratio on Friday, most traders now see these measures being announced in August or September, when the festive season would require additional liquidity in the banking system. Current systemic liquidity is in a comfortable surplus, they said. On Wednesday, the RBI had net absorbed INR 2.86 trillion from the banking system, compared with INR 3.01 trillion Tuesday, central bank data showed. Some dealers, however, expect an OMO calendar post the June policy review. 

Volumes in the 10-year 6.79%, 2034 gilt soared to INR 229.30 billion, compared to an average of INR 175.28 billion seen in the first three days of the week. Traders preferred to build positions in this gilt, and are likely to transition to the newly issued 10-year, 6.33%, 2035 gilt, only after the MPC decision, they said. 

"From an ALM (asset and liability management) perspective, everyone is light (in gilt holdings), but traders have built positions for the MPC," a dealer at another state-owned bank said. "Traders, mostly from PSU banks, preferred the 2034 gilt since it's a liquid paper. The 2035 gilt is not liquid enough yet and its valuation is too expensive. No one will want to buy at such a low yield."

At the INR-250-billion buyback auction, the government bought back 5 gilts worth INR 238.56 billion. The RBI set the cut-off prices higher than the indicative prices of the Financial Benchmarks India Ltd. Most traders had expected cut-offs to be at par with the indicated prices, but some state-owned and private-sector banks had said they would sell at higher prices due to expectations of a 25 bps rate cut Friday, which drove up demand for short-term gilts.

This was the first buyback auction of FY26, and traders expect more to come. Some traders expect buybacks worth INR 1.00 trillion in FY26, after the central bank announced a record-high transfer of surplus of INR 2.69 trillion to the Centre.

Traders expect the government to continue buying back gilts maturing in FY27 due to heavy gilt redemptions that year, dealers said. Trades were focused on building positions before the MPC outcome, so they mostly ignored the higher prices at the buyback auction, they said. 

Traders speculated that foreign banks were purchasing gilts Thursday ahead of the policy outcome. Traders also expect insurance companies to have continued buying gilts in the secondary market Thursday, dealers said. The 'Others' segment of market participants, which includes insurance companies, provident funds and the Reserve Bank of India, bought gilts worth INR 243.03 billion in the secondary market between May 22 and Wednesday. 

A fall in US Treasury yields also aided the rise in bond prices, dealers said. At market open, bond prices opened higher due to the overnight fall in US yields. The yield on the 10-year US Treasury note fell to 4.37% at 1700 IST, from 4.38% at 0900 IST and 4.47% at the close of Indian market hours Wednesday.

The turnover in the gilt market was INR 500.90 billion, slightly higher than INR 424.05 billion Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the sixth consecutive day, there were no trades using the wholesale digital rupee pilot Thursday.

OUTLOOK

Bond prices are likely to open steady Friday on caution ahead of the rate decision, dealers said. Traders await RBI Governor Sanjay Malhotra's commentary on the rate outlook, inflation and growth.

The result of the INR-320-billion gilt auction will hinge on the MPC outcome, especially since the bonds offered are longer-term papers, dealers said. The government will sell INR 160 billion each of the 6.92%, 2039 bond and the 6.90%, 2065 bond at 1230-1330 IST.

Gilts may also take cues from the movement of US Treasury yields overnight, though the impact of the offshore trigger may be limited ahead of the key domestic event. Caution ahead of the release of the US non-farm payrolls data may limit some activity in gilts towards the end of the session, dealers said. The data will be released after Indian market hours on Friday.

The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.10-6.30% and that on the most-traded 6.79%, 2034 bond is seen at 6.15-6.35% Friday.

India Gilts: Up; 2034 gilt volume up on bets of lower CPI view in RBI policy

MUMBAI--1600 IST--Prices of government bonds were up as traders covered short bets ahead of the Monetary Policy Committee's decision Friday. Traders expect the Reserve Bank of India to lower its inflation forecast for 2025-26 (Apr-Mar) and asymmetrically widen the corridor between the repo rate and the Standing Deposit Facility rate, dealers said. Bonds have already priced in a 25 basis point cut in the repo rate.

Volumes of the 6.79%, 2034 gilt surged to INR 191.35 billion at 1600 IST, against the average volume of INR 175.28 billion of the bond at the end of trade so far this week. In the special repo segment of the Clearcorp Repo Order Matching System, the volume of the 6.79%, 2034 gilt was INR 91.46 billion as at 1515 IST, slightly lower than INR 92.99 billion Thursday. The number of trades in a paper in the special repo segment of the Clearcorp Repo Order Matching System shows the short sales in a particular bond.

Traders picked up bonds on bets that the RBI would asymmetrically widen the Liquidity Adjustment Facility corridor by 25 bps on the lower end, which would lower the Standing Deposit Facility rate by 25 bps further below the repo rate, while keeping the Marginal Standing Facility rate the same.

Traders also bet on the central bank lowering its inflation estimate for the FY26 by 20-30 bps. At the rate-setting panel's meeting in April, RBI Governor Sanjay Malhotra had said the RBI's inflation estimate for FY26 was 4.0%.

"...The 2034 gilt can hit 6.10% also if there's a 50 bps rate cut," a dealer at a state-owned bank said. "Mostly though, we are expecting the SDF to be widened so that arbitrage trades reduce. And we can see RBI lowering its inflation forecast to 3.2% also."

Bond prices were little changed after the result of the INR 250-billion buyback auction, the first of FY26. Cut-off prices were higher than those indicated by Financial Benchmarks India Ltd. The government accepted bids worth INR 238.56 billion at the auction, which traders had expected. Some state-owned and private sector banks had said they would sell the bonds at higher-than-indicated prices since banks were already sitting on hefty profits, and would not be aggressive in wanting to sell short-term securities, which are currently favourites of traders, to the government.

Market participants expect more such auctions, totalling around INR 1.00 trillion, after the central bank announced a record high transfer of surplus to the central government for FY25. However, traders are focussing on the RBI Governor's commentary, scheduled for 1000 IST Friday.

The turnover in the gilts market was around INR 375.15 billion at 1530 IST, higher than INR 317.70 billion around the same time Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the rest of the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.18-6.22%. For the 6.79%, 2034 gilt, dealers see the yield at 6.23-6.27%.  (Cassandra Carvalho)

India Gilts: Remain up; volumes muted on caution before MPC outcome Fri

MUMBAI--1217 IST--Government bond prices remained up due to an overnight fall in US Treausry yields. However, trade volumes remained muted and gains were capped before the outcome of the Reserve Bank of India's Monetary Policy Committee meeting, due on Friday, dealers said.

"It is mostly a traders' market right now, " a dealer at a state-owned bank said. "US yields are down, so that is giving some support. But overall, people are just in a wait-and-watch mode before policy because so many expectaions and hopes are pinned on that...just some last-minute positioning is happening today (Thursday)."

While traders have priced in a 25-basis-point rate cut by the RBI's rate-setting panel on Friday, they re-aligned their books based on their expectations of other measures on liquidity and indication of further rate cuts by the central bank during the year, dealers said. Meanwhile, some forein portfolio investors bought Indian gilts maturing in seven to 10 years as the yield on the 10-year US Treasury note fell to 4.36% from 4.47% at 1700 IST Wednesday. However, most waited for the MPC's policy outcome and US jobs data on Friday and kept to the sidelines, dealers said. 

At the INR 250-billion buyback auction, primary dealers and mutual funds are expected to tender the bonds offered by the RBI at prevailing market prices for most bonds, dealers said. State-owned banks are expected to tender the bonds most as they hold the majority of the gilts offered to be bought back in their books, they said. Some market participants expect a lower amount of bonds to be tendered at the buyback auction Thursday on hope of more OMO auctions or buyback auctions being announced by the RBI after the policy outcome. 

Some traders found the yield on the 15-year benchmark 6.92%, 2039 attractive to buy, they said. The yield spread on the 15-year gilt over the erstwhile benchmark 6.79%, 2034 has widened to over 16 basis points from nearly 10 bps at the beginning of May. With the current 10-year benchmark 6.33%, 2035 bond, the yield spread is nearly 22 basis points. The government has offered to sell INR 160 billion of the 15-year gilt at the auction on Friday, but the yield spread is expected to compress on Friday if the RBI cuts the repo rate and indicates further rate cuts during the year, dealers said. 

The turnover in the gilts market was around INR 178 billion at 1216 IST, slightly higher than INR 143 billion around the same time on Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.18-6.22%. For the 6.79%, 2034 gilt, dealers see the yield at 6.23-6.27%.  (Srijita Bose)

India Gilts: Up on overnight fall in US ylds; traders await buyback auction

MUMBAI--0920 IST--Prices of government bonds were up on account of an overnight fall in US Treasury yields, dealers said. Caution before the result of the INR 250-billion buyback auction capped the gains, they said. 

"Right now, it's just US yields which came down, so prices (of gilts) moved a bit high," a dealer at a private sector bank said. "But there is big event tomorrow (Friday), so no one will take any big positions."

As of 0915 IST, the yield on the 10-year benchmark US Treasury note was 4.38%, down 9 basis points from 4.47% at the Indian market close Wednesday. The fall in US Treasury yields was largely on account of weaker than expected jobs data, which raised hope of the US Fed cutting policy rates to support the slowing economy. US President Donald Trump Wednesday urged the Federal Reserve to lower interest rates.

Traders were of the view that the fall in US yields is likely to trigger some inflows from overseas investors. However, some said foreign portfolio investors were likely to await the Reserve Bank of India's Monetary Policy Committee's decision on policy rates Friday before picking up gilts. 

Traders also await the result of the buyback auction, at which the government has offered to buy INR 250 billion worth of five gilts maturing in 2026-27 (Apr-Mar). The gilts up for buyback are the 7.27%, 2026 bond; the 6.99%, 2026 bond; the 6.97%, 2026 bond; the 7.33%, 2026 bond; and the 8.24%, 2027 bond. Traders expect the 8.24%, 2027 gilt to be tendered the most by banks as it has the largest outstanding figure among the gilts at the auction. The gilt has an outstanding quantum of INR 966.01 billion. State-owned banks are likely to be major participants at the auction as these banks are the major holders of the bonds to be bought back, dealers said.

The turnover in the gilts market was INR 44.55 billion at 0915 IST, slightly higher than INR 44.30 billion at the same time on Wednesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. During the day, the yield on the 10-year benchmark 6.33%,2035 gilt is seen at 6.18-6.22%. For the 6.79%, 2034 gilt, dealers see the yield at 6.23-6.27%. (Vidhushi RajPurohit)

India Gilts: Seen tad up on fall in US yields; buyback auction result eyed

MUMBAI – Prices of government bonds are likely to open slightly higher Thursday, tracking an overnight fall in US Treasury yields, dealers said. The gains are expected to be capped as traders will await the result of the INR 250-billion buyback auction. Caution ahead of the Reserve Bank of India's Monetary Policy Committee's decision on Friday will also limit any sharp movement in prices, dealers said.

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.18-6.23%. The gilt ended at INR 100.90 or 6.21% yield on Wednesday. For the most taded and erstwhile 10-year benchmark, 6.79%, 2034 gilt, traders expect a range of 6.22-6.27%. The 2034 gilt closed at INR 103.71 or 6.26% yield on Wednesday.

As of 0730 IST, the yield on the 10-year benchmark US Treasury note was 4.37%, down 10 basis points from 4.47% at the Indian market close Wednesday. The fall in US Treasury yields was on account of weaker than expected jobs data, which led US President Donald Trump to urge the US Federal Reserve to lower interest rates. The ADP National Employment Report, published Wednesday, showed US private payrolls rose by only 37,000 in May, after a downwardly revised rise of 60,000 in April. Economists in a Dow Jones poll had estimated employment to rise 110,000. The non-manufacturing Purchasing Managers' Index also fell 49.9 in May from 51.6 in April, which further fuelled investors' fears of a slowdown in the world's largest economy. 

Traders expect the fall in US yields to spur some buying by overseas investors, dealers said. A fall in US yields widens the interest rate differential on the 10-year benchmark Indian gilt yield over the safe haven asset, which makes it more attractive for FPIs to buy gilts.

However, the gains are expect to be capped as traders will eye the result of the buyback auction due at 1030-1130 IST. The gilts up for buyback are the 7.27%, 2026 bond; the 6.99%, 2026 bond; the 6.97%, 2026 bond; the 7.33%, 2026 bond; and the 8.24%, 2027 bond. The gilts are likely to be tendered at levels close to those indicated by Financial Benchmarks India Pvt. Ltd., dealers said. Participation at the auction is expected to be firm, with state-owned banks being the major holders of the bonds to be bought back, they said.

Traders will also refrain from aggressive positioning before the outcome of the MPC meeting on Friday. The MPC commenced its policy review meeting Wednesday and traders have already positioned for a 25-bps repo rate cut. Traders now await RBI Governor Sanjay Malhotra's policy statement to gauge the rate cut trajectory and any commentary on liquidity, inflation and growth, dealers said. (Vidhushi RajPurohit)

End

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

Edited by Saji George Titus

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