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Informist, Friday, Jun. 6, 2025

By Cassandra Carvalho

MUMBAI – Prices of most government bonds slumped in a volatile trading session after the Reserve Bank of India's Monetary Policy Committee on Friday reverted back to its 'neutral' stance from a change to 'accommodative' at its meeting in April.

"RBI has just front-loaded everything it wanted to do to spur growth," a dealer at a state-owned bank said. "From a macro point of view, it's all very good, but for bond traders, there's little to look forward to."

The change in stance and RBI Governor Sanjay Malhotra's comment that the rate-setting panel was left with "very limited space" to ease policy further has left no reason for bond traders to expect a further fall in gilt yields. They now see the terminal repo rate at 5.50%, dealers said. 

Traders called the policy outcome a "bazooka" as the RBI delivered beyond traders' expectations on several fronts but did not indicate further cuts in the repo rate. The MPC cut the repo rate by 50 basis points, against traders' expectations of a 25-bps cut. The central bank also announced a 100-bps cut in the banks' cash reserve ratio over four tranches. Most traders did not expect a cut in CRR, though a few expected a cut of 25 bps.

As expected, the central bank lowered its CPI inflation forecast for 2025-26 (Apr-Mar) to 3.7% from 4.0% earlier, though it retained its GDP growth forecast. However, the change in stance and Malhotra's comments about "very limited space" to ease policy further, weighed on traders' rate views.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.67, or 6.24% yield, compared with INR 100.98, or 6.20% yield at close Thursday. The most-traded bond 6.79%, 2034 bond closed at INR 103.48, or 6.29%, compared with INR 103.79, or 6.25% Thursday. Yields of both the gilts closed at their highest levels since May 19.

Traders had expected the central bank to asymmetrically widen the Liquidity Adjustment Facility corridor by reducing the Standing Deposit Facility rate by 25 bps. The central bank did not resort to such an adjustment, but traders said the liquidity boost from the CRR cut compensated for it.

Trade was volatile, especially during the governor's statement and the post-policy conference. "RBI governor said they reduced rates and then paused for one minute before the next sentence," a dealer at a private-sector bank said. "So bonds rallied and next he said they changed stance. So there was a sell-off. Then again the CRR (cut) was announced so some recovery (was there). Later again during press conference it (bonds) fell, because of devolvement fears also. It's not been an easy day." Market participants across banks and primary dealerships had lightened their portfolios before the key policy decision, dealers said.

Short-term bonds were up during the day due to the liquidity boost. This was even as prices of gilts maturing in 10 years and above slumped. Traders continue to prefer the shorter-end of the yield curve – securities maturing in up to seven years – since constant infusion of liquidity is expected from the central bank, even if rate cuts seem to have hit a pause, dealers said. The yield of the 6.75%, 2029 gilt could fall further by 20 bps, a dealer said. The gilt yield hit the day's low of 5.67% and ended 3 bps lower at 5.82%.

Dealers expect the MPC to keep status quo on rates at its next meeting in August. Some expect a 25 bps cut in October or December and some in both. The scope for further cuts would hinge on growth and inflation, dealers said. Before the policy outcome, traders had expected the benchmark 10-year gilt yield to hit 6.00% if the terminal repo was 5.00-5.25%. However, dealers now see 6.00% yield on the 10-year bond only if GDP and CPI numbers are significantly low.

In the weekly gilt auction held during the day, cut-off prices were largely within expectations and led to a slight recovery in secondary market prices, dealers said. The government sold INR 160 billion each of the 6.92%, 2039 gilt and the 6.90%, 2065 gilt. The cut-off price on the 2039 bond was INR 103.85, lower than an Informist poll estimate of INR 103.95. The cut-off price on the 2065 gilt was INR 99.33, slightly higher than the poll estimate of INR 99.31.

Traders initially feared that both bonds could get devolved, after the slump in bonds in the secondary market. Fears of devolvement led to higher-than-expected cut-offs at the underwriting auction. The central bank set an underwriting fee of 2.37 paise on the 2039 gilt and 3.90 paise on the 2065 gilt, the highest since the escalation in conflict between India and Pakistan.

However, the auction sailed through on demand from state-owned banks and mutual funds for the 2039 paper, and interest from insurance companies for the 2065 bond. Around INR 15 billion of the long-term paper was bought for forward-rate agreements and about INR 25 billion of the same bond was bought for Separate Trading of Registered Interest and Principal of Securities, because of which the cut-off on the 2065 bond was higher than estimated, dealers said.

Near the end of the session, prices of government bonds fell further as traders cut their exposure to risk ahead of the weekend. "There is key jobs data post market hours in the US and we don't know whether US yields could go up or down after that," a trader at a primary dealership said. "And all those who had overbought at the auction are selling now...nationalised banks, foreign banks and some PDs (primary dealerships)."

The turnover in the gilt market was INR 1.30 trillion, more than double of Thursday's INR 500.90 billion, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the seventh consecutive day, there were no trades using the wholesale digital rupee pilot.

OUTLOOK

Gilts are not traded Saturday. On Monday, bond prices are likely to take cues from the movement of US yields over the weekend after the US employment report for May, dealers said. Data released after Indian market hours showed US non-farm payrolls rose 139,000 in May, against a Dow Jones consensus estimate of 125,000.

Next week, traders expect bond prices to recover from the sharp fall Friday, as they digest the 50 bps cut in the repo rate. Bond prices may trade higher Monday after the RBI, post market, announced a government bond buyback of five gilts for INR 260.00 billion. Most traders expect a series of buyback auctions after the central bank transferred a record high surplus to the Centre for FY25. 

The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.18-6.25% and that on the most-traded 6.79%, 2034 bond is seen at 6.25-6.32% Monday.

India Gilts: Recover some losses as results of bond auction better than view

MUMBAI--1627 IST--Government bond prices recovered slightly as the results of the INR 320-billion auction were better than the market's expectations, dealers said. However, market sentiment was hit as the Reserve Bank of India's Monetary Policy changed the policy stance to 'netural', and this kept prices sharply lower than Thursday's close. 

"Cut-offs at the auction were far better than what market feared, so that is providing some support," a dealer at a private sector bank said. "But overall, market does not have much left to play with as rate cuts look to be done for now."

Some traders had feared that both bonds at the weekly gilt auction could be at least partially devolved as the MPC's stance change dashed their hopes of further rate cuts in 2025, dealers said. However, demand from mutual funds and private banks, which had been underinvesed in bonds going into the RBI's policy outcome, helped the auction sail through, they said. Demand for Separate Trading of Registered Interest and Principal of Securities and Forward Rate Aggrements also led to better cut-off prices at the auction, dealers said. Insurers demanded forward rate agreements of around INR 15 billion for the 6.90%, 2065 bond at the auction, they said.

The turnover in the gilts market was INR 1.23 trillion at 1619 IST, sharply higher than INR 401.70 billion around the same time on Thursday, 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 6.18-6.25%. For the 6.79%, 2034 gilt, dealers see the yield at 6.23-6.32%.  (Srijita Bose)

India Gilts: Fall more on RBI Malhotra's comments, uncertainty on rate view

MUMBAI--1301 IST--Prices of government bonds fell more after Reserve Bank of India Governor Sanjay Malhotra, at the post-policy press conference, said the central bank's Monetary Policy Committee was left with very limited space to ease policy further. Traders were uncertain on the future rate cut trajectory after the MPC changed its stance to 'neutral' from 'accomodative'. Earlier, bonds rose briefly after the central bank cut the repo rate by a bumper 50 basis points Friday. Bonds had priced in only a 25 bps cut in the repo rate. 

"In the first question itself, when they asked whether do you see the terminal repo at 5.50%, whatever he said (RBI governor) made it look that it's quite obvious that it is, and he said that MPC has minimum scope, it is limited in its ability to cut rates," a dealer at a private sector bank said. 

While gilts maturing in 10 years or longer fell more, short-term gilts were up due to the central bank's liquidity boost. The RBI will cut the cash reserve ratio by 100 bps in four tranches of 25 bps starting Sept. 6. Most dealers did not expect a CRR cut, but those who did had only expected a 25 bps cut. The yield on the 6.75%, 2029 gilt was down around 5 basis points from Thursday's close at 5.80%. However, the scope for further steepening of the gilt yield curve is seen limited, as traders expect a terminal repo of 5.50% after Friday's policy. Before the policy meeting, traders had hoped the MPC would leave the door open for a terminal repo of 5.00-5.25%. 

Some traders feared that both bonds at the weekly gilt auction could be at least partially devolved. The government aimed to sell INR 160 billion each of the 6.92%, 2039 gilt and the 6.90%, 2065 gilt at the auction at 1230-1330 IST. The central bank set an underwriting fee of 2.37 paise on the 2039 gilt and 3.90 paise on the 2065 gilt, the highest such estimates since the escalation in the conflict between India and Pakistan – on May 9, the RBI set an underwriting fee of 14 paise on the 2039 gilt and 30 paise on the 2065 gilt. However, other dealers said devolvement was unlikely. A dealer said that mutual funds were bidding at the auction for both papers. The longer-term bond is also likely to have seen some demand from insurers, though the bidding was not aggressive, dealers said. 

The turnover in the gilts market was INR 1.04 trillion at 1320 IST, sharply higher than INR 228.45 billion at the same time on Thursday, 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 6.18-6.25%. For the 6.79%, 2034 gilt, dealers see the yield at 6.23-6.32%.  (Cassandra Carvalho)

India Gilts: Reverse all gains as MPC changes stance to 'neutral'

MUMBAI--1047 IST--Government bond prices reversed all gains after the Reserve Bank of India' Monetary Policy Committee changed its policy stance to 'netural' from 'accomodative', dealers said. Prices had risen after the repo rate was cut by 50 basis points to 5.50% and the cash reserve ratio was cut by 100 bps to 3% of banks' net demand and time liabilites in four tranches.

"I think they (MPC) have front-loaded the cuts. The have front-loaded the August cut," a dealer at a private sector bank said. "Since they have changed the stance, I don't see the next cut anytime soon."

In the monetary policy statement, RBI Governor Sanjay Malhotra announced the change in the policy stance and kept the growth forecasts unchanged, saying that the economy was resilient. Expectations of further rate cuts were dashed after the MPC changed its stance, dealers said. Traders now widely expect the terminal repo rate to remain at 5.50%, they said. However, the fall in prices was limited as the cut in cash reserve ratio will bring in additional liquidity of INR 2.5 trillion into the banking system, dealers said. 

The turnover in the gilts market was INR 656.50 billion at 1030 IST, higher than INR 122.80 billion at the same time on Thursday, 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: Steady as traders await outcome of MPC's 3-day meeting

MUMBAI--0915 IST--Prices of government bonds were steady as traders await the Reserve Bank of India's monetary policy statement at 1000 IST, dealers said. Traders have positioned for a 25-basis-cut in the poicy rate and they now await commentary by RBI Governor Sanjay Malhotra on liquidity, inflation and domestic growth to gauge the future rate cut trajectory, they said.

"Now, there is nothing to do but wait and see what the MPC has decided to do," a dealer at a state-owned bank said. "A 25 bps cut will not lead to much movement but a deeper cut or a dovish tone can make the market jump."

Along with a cut in the repo rate, dealers also expect the RBI to asymmetrically widen the Liquidity Adjustment Facility corridor by reducing the Standing Deposit Facility rate by 25 bps. Some were also looking at a reduction in the requirement of minimum daily cash reserve ratio balance maintenance to around 80% of the fortnightly requirement from the current 90%. 

Some dealers expect a downward revision in the growth and inflation forecast for 2025-26 (Apr-Mar). The RBI could lower its inflation estimate for by 20-30 bps from an average of 4.0% projected at the April MPC meeting for FY26. Traders also expect the RBI to cut its GDP growth forecast for FY26 to 6.2-6.3% from 6.5%. 

The turnover in the gilts market was INR 27.90 billion at 0915 IST, lower than INR 44.55 billion at the same time on Thursday, 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 6.10-6.30%. For the 6.79%, 2034 gilt, dealers see the yield at 6.15-6.35%. (Vidhushi RajPurohit)

India Gilts:Seen steady on caution before MPC outcome, Malhotra's commentary

MUMBAI – Prices of government bonds are likely to remain steady Friday before the Reserve Bank of India's Monetary Policy Committee announces the outcome of its three-day policy review meeting, dealers said. The outcome of the meeting will also dictate demand at the INR 320-billion gilt auction at 1230-1330 IST, they said. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.10-6.30%. The gilt ended at INR 100.98 or 6.20% yield on Thursday. The movement of the yield will depend on the MPC's decision on policy rates. Most traders expect the rate-setting committee to cut the repo rate by 25 basis points to 5.75%. Traders expect the yield on the gilt to either rise marginally or remain unchanged in case of a 25-bps cut, since the outcome has largely been priced in, dealers said. 

Some dealers also expect a 50-bps cut in the repo rate and if the MPC delivers it, the yield on the 2035 gilt is likely to fall sharply by 8-10 bps, dealers said. The commentary by RBI Governor Sanjay Malhotra on growth, inflation and liquidity will be keenly eyed, they said. The central bank is likely to lower its inflation estimate for 2025-26 (Apr-Mar) by 20-30 bps, dealers said. In its April policy, the RBI had projected 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%.

For the most traded and erstwhile 10-year benchmark, 6.79%, 2034 gilt, traders expect a range of 6.15-6.35%. The 2034 gilt closed at INR 103.79 or 6.25% yield on Thursday.

Some traders also expect the RBI to asymmetrically widen the Liquidity Adjustment Facility corridor by reducing the Standing Deposit Facility rate by 25 bps. Most traders were of the view that the RBI could skip announcing any further liquidity infusing measure as systemic liqidity is in a comfortable position. However, if there are further measures, traders expect gilt prices to rise sharply. 

"There could be some soft commentary by (RBI) governor for smoother transmission of cut but any measures for liquidity may not be there," a dealer at a state-owned bank said. "The market is looking at a cut, if its 25 bps, then I do not expect any momentum, but 50 bps will definitely lead to a rally...what the governor says for inflation and growth forecast will be very important."

The MPC decision on rate cut will also determine how the INR 320-billion gilt auction turns out. At the gilt auction, the government has offered to sell INR 160 billion each of the 6.92%, 2039 bond and the 6.90%, 2065 bond. (Vidhushi RajPurohit)

End

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

Edited by Ashish Shirke

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