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Informist, Tuesday, Jun. 17, 2025

By Srijita Bose 

MUMBAI – Government bond prices ended off highs Tuesday on reports of a fresh escalation in the Israel-Iran conflict and traders selling bonds at a profit, dealers said. Gilt prices rose drawing comfort from Reserve Bank of India Governor Sanjay Malhotra's comments on inflation and rate cuts, dealers said.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.47, or 6.26% yield, compared with INR 100.41, or 6.27% yield, at Monday's close. The most-traded 6.79%, 2034 bond closed at INR 103.27, or 6.32% yield, compared with INR 103.21, or 6.33% yield, Monday.

Shorter tenure gilts regained some favour, after having underperformed last week, on Malhotra's comments that the space for policy easing would "open up" if "the inflation outlook turns out to be below our (the central bank's) projections". CPI inflation for May was 2.82%, below consensus estimates. The RBI's revised forecast for Apr-Jun is 2.9%.

The 6.75%, 2029 gilt rose intraday to a day's high, which was 15 paise from Monday's close, after largely underperforming last week. While traders expect the gilt yield curve to flatten slightly in the short-end as they do not expect a cut in the repo rate in the near term, Malhotra's comments soothed their fears of the possiblility of variable rate reverse repo auctions, dealers said. Malhotra said it wasn't unusual for the weighted average call rate to trade closer to the RBI's standing deposit facility rate in surplus liquidity conditions, and that variable rate repo and VRRR auctions would not impact durable liquidity. Some traders also preferred short-term gilts owing to the persistent geopolitical uncertainty, dealers said.

"The market derived some comfort from the governor's comments, specifically for shorter-tenure bonds," a dealer at a state-owned bank said. "Some may still think it (the short end) is more expensive since it rallied so much before policy. But these are still good levels to add in ALM (asset-liability management) books."

Gilts opened higher in early trade taking cues from the governor's comments. However, during the day, gilts turned choppy as the Israel-Iran conflict escalated. Stop-losses on the erstwhile 10-year benchmark 6.79%, 2034 gilt were triggered when it fell below INR 103.24, which led to a sudden fall in prices across tenures, dealers said. Mutual funds are likely to have sold gilts maturing in less than five years and longer-tenure bonds while buying gilts maturing within five to 10 years, dealers said. Traders also took intraday profits after prices rose in early trade, which also led to bonds erasing some gains, they said. Purchases by state-owned banks kept gilts from falling further, dealers said.

Some dealers preferred the 15-year gilt due to lucrative spreads over the benchmark 6.33%, 2035 gilt. The yield spread of the 6.92%, 2039 gilt over the 2035 gilt widened to over 32 basis points Tuesday from 26 bps Jun. 6, the day of the RBI's Monetary Policy Committee meeting outcome. The 2039 gilt was the third-most traded paper on the RBI's Negotiated Dealing System-Order Matching platform, with the traded amount being INR 36.15 billion.

Longer tenure bonds were down after rising in previous trading sessions on likely sales by foreign banks and uncertainty on the geopolitical front, they said. Though traders have priced in crude oil till almost $80 per barrel against the day's high of $75 per barrel for Brent crude oil for August delivery, some traders trimmed their risk on longer tenures owing to the escalation in the Israel-Iran conflict, dealers said. Foreign portfolio investors are also likely to have sold longer-tenure gilts while buying gilts maturing in up to 10 years, they said.

Some traders also sold bonds maturing in over 30 years after the RBI governor indicated that the central bank was comfortable with current yield spreads, dealers said. The yield spread on the 30-year 7.09%, 2054 bond over the 10-year benchmark 6.33%, 2035 gilt has widened to over 75 bps from 56 bps a month ago, despite a jumbo repo-rate cut of 50 bps delivered by the Monetary Policy Committee. With persistent uncertainty on the geopolitical outlook as well as expectation of supply pressure in longer-tenure bonds, some traders exited their long positions in these bonds, dealers said. However, others picked up longer-tenure bonds as they found yield spreads attractive, which capped losses in these bonds, they said. Some demand for Separate Trading of Registered Interest and Principal of Securities in bonds maturing in 40-50 years was also visible from insurers, dealers said.

"There is still a supply pressure in long bonds. But the spreads are really good to put in long-term bonds," a dealer at a private-sector bank said. "Also, part of the movement in long term is also in tandem with other tenures and since it rose this week, today it may look like it is underperforming. Still there are good flows in the segment."

The results of the INR 85-billion state bond auction were broadly in line with market expectations, dealers said. Spreads on longer-tenure state bonds over gilts with similar tenures narrowed from the previous state bond auction owing to lower-than-indicated supply at the auction. In the Apr-Jun calendar, it was indicated that 15 states Tuesday would raise INR 242.00 billion at the auction. Insurers and pension funds bought state bonds at the auction along with banks, dealers said.

Turnover in the gilts market was INR 662.35 billion, higher than INR 588.15 billion Monday, according to data on the RBI's NDS-OM platform. There were two trades in the 7.10%, 2034 bond worth INR 100 million through the wholesale digital rupee pilot, the same as Monday.

OUTLOOK

Wednesday, bond prices are likely to take cues from geopolitical developments. Bond traders remain wary of any escalation in the Israel-Iran conflict, though a surge in crude oil prices has been priced in to an extent, dealers said. Additionally, if the rupee falls sharply against the dollar due to a rise in crude oil prices, it may also indirectly hit bond prices, they said. 

When the market opens, gilts may also take cues from the overnight movement of US yields, dealers said. Traders now look forward to the outcome of the US Federal Open Market Committee meeting late Wednesday. They expect a status quo on rates but will focus on comments by Fed officials.

While shorter-tenure bonds somewhat regained favour after the RBI governor's comments, traders may prefer liquid bonds such as the 10-year and 15-year gilts, they said. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.22-6.32%. The yield on the most-traded 6.79%, 2034 bond is seen at 6.28-6.40% Wednesday.

India Gilts: Mixed; longer-tenure bonds down on likely sales by foreign banks

MUMBAI--1555 IST--Government bond prices were in a mixed zone. The 10-year benchmark gilt was up on likely purchases by state-owned banks, dealers said. Longer tenure bonds were down more on likely sales by foreign banks and uncertainty on the geopolitical front, they said.

Bonds earlier erased all gains after reports of a fresh escalation in the Israel-Iran conflict. Mutual funds are likely to have sold gilts maturing in less than five years, dealers said. Traders also took intraday profits after prices rose in early trade, which also led to bonds erasing gains, they said.

Though traders have priced in crude oil till almost $80 per barrel against the current price of $74.29 per barrel of Brent crude oil for August delivery, some traders trimmed their risk on longer tenures owing to the escalation in the Israel-Iran conflict, dealers said. Some traders sold bonds maturing in over 30 years after Reserve Bank of India Governor Sanjay Malhotra, in an interview to Business Standard, indicated that the central bank was comfortable with current yield spreads, dealers said. The yield spread on the 30-year 7.09%, 2054 bond over the 10-year benchmark 6.33%, 2035 gilt has widened to over 75 basis points from 56 bps a month ago, despite a jumbo repo-rate cut of 50 bps delivered by the RBI's Monetary Policy Committee. With persisting uncertainty on the geopolitical outlook as well as expectation of supply pressure in longer-tenure bonds, some traders exited their long positions in these bonds, dealers said.

"The governor's comment on bond yields was a negative for long bonds. Comparing spreads with COVID-era is not correct," a dealer at a private-sector bank said. "Even the comparison on historical averages is not great because we are currently in a rate-easing cycle where spreads are ususally lesser. Also, it shows that spreads could go up more and the supply pressure on long bonds will also be there." However, other dealers said Malhotra's comments opened up chances of further rate cuts if inflation continues to be in the lower end of the central bank's comfort band. This has led some to pick up longer-tenure bonds as they found yield spreads attractive, they said.

Meanwhile, the results of the INR 85-billion state bond auction were broadly in line with market expectations, dealers said. Spreads on longer-tenure state bonds over gilts with similar tenures narrowed from the previous state bond auction owing to lower-than-indicated supply at the auction. In the Apr-Jun calendar, it was indicated that 15 states Tuesday would raise INR 242.00 billion at the auction. Insurers and pension funds bought state bonds at the auction along with banks, dealers said. 

The turnover in the gilts market was INR 511.15 billion at 1530 IST, sharply higher than INR 413.80 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 10-year benchmark 6.33%, 2035 gilt is seen at 6.20-6.30% and that on the 6.79%, 2034 gilt at 6.28-6.36%, dealers said.  (Srijita Bose)

India Gilts: Erase most gains on reports of fresh strikes by Israel, Iran

MUMBAI--1320 IST--Government bonds gave up most gains and trade was choppy as the Israel-Iran conflict escalated, dealers said. Bond prices were up early in the day on Reserve Bank of India Governor Sanjay Malhotra's comments in an interview with newspaper Business Standard. However, profit booking by traders erased almost all the gains after Iran launched a fresh missile attack and Israel continued its airstrikes.

"We've not fallen much, some 7-8 paise only. There were some flashes on the Iran-Israel geopolitical situation so traders who had built a position since morning must have gotten out of them," a dealer at a state-owned bank said.

Al Jazeera reported that blasts rocked Tehran and air raid sirens went off in Tel Aviv. The Wall Street Journal reported that Israel had killed a senior Iranian commander in an airstrike in Tehran. This triggered stop losses on the 6.79%, 2034 gilt when it fell below INR 103.24, which led to a sudden fall in prices across tenures.

The 6.75%, 2029 gilt last traded at INR 103.18, up 11 paise from Monday's close, after largely underperforming last week. Traders expect the gilt yield curve to flatten slightly, as they do not expect a cut in the repo rate in the near-term. However, they still prefer short-term gilts due to the geopolitical uncertainty, they said.

Some dealers preferred the 15-year gilt due to lucrative spreads over the benchmark 6.33%, 2035 gilt. The yield spread of the 6.92%, 2039 gilt over the 2035 gilt widened to 33 basis points Tuesday from 26 bps on Jun. 6, the day of the RBI's Monetary Policy Committee meeting outcome. The 2039 gilt was the third-most traded paper on the RBI's Negotiated Dealing System-Order Matching platform, with the traded amount at INR 25.70 billion.

The turnover in the gilts market was INR 362.95 billion at 1230 IST, sharply higher than INR 157.55 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 10-year benchmark 6.33%, 2035 gilt is seen at 6.20-6.30% and that on the 6.79%, 2034 gilt at 6.28-6.36%, dealers said.  (Cassandra Carvalho)

India Gilts: Up; RBI Malhotra says low inflation could lead to policy easing

MUMBAI--0915 IST--Prices of government bonds opened higher and volumes picked up after Business Standard quoted Reserve Bank of India Governor Sanjay Malhotra saying that the space for policy easing would "open up" if "the inflation outlook turns out to be below our (the central bank's) projections". CPI inflation for May was 2.82%, below consensus estimates and lower than the RBI's forecast of 2.9% for Apr-June. In early trade Tuesday, the most traded 6.79%, 2034 gilt fell to the key 6.30% yield level, which was not seen in a week. 

"I don't see the 10-year yield going to 6.20% now, but there is space of 1-2 bps lower from current level," a dealer at a state-owned bank said. "Geopolitically, there's still some negativity because of Iran-Israel...but things (domestically) have eased off."

The RBI governor also said it wasn't unusual for the weighted average call rate to trade closer to the RBI's Standing Deposit Facility rate in surplus liquidity conditions, and that variable rate repo or variable rate reverse repo auctions would not impact durable liquidity. 

Traders were uncertain about the central bank's future policy moves after the RBI's Monetary Policy Committee on Jun. 6 unexpectedly cut the repo rate by 50 bps and the cash reserve ratio by 100 bps but reverted its stance to 'neutral' from 'accomodative'. Fears of restrictive monetary policy increased after Reuters last week citied a source aware of the central bank's thinking saying that "the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required", which spooked bond traders.

On the global front, Brent crude oil futures inched up after US President Donald Trump on Tuesday called for the immediate evacuation of Iran's capital, Tehran. This limited the rise in bond prices, along with profit-booking as current levels haven't been seen in a week, dealers said. 

The turnover in the gilts market was INR 136.50 billion at 0930 IST, sharply higher than INR 30.65 billion at the same time on Monday, 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 6.20-6.30%. For the 6.79%, 2034 gilt, dealers see the yield at 6.28-6.36%.  (Cassandra Carvalho) 

India Gilts: Seen higher after RBI Malhotra's comments on inflation, VRRRs

MUMBAI – Prices of government bonds are seen opening 5-10 paise higher Tuesday after Reserve Bank of India Governor Sanjay Malhotra said that the space for policy easing would "open up" if "the inflation outlook turns out to be below our (the central bank's) projections". Dealers said Malhotra's comments were positive for the bond market, and allayed some fears of a restrictive policy. 

Malhotra also said it wasn't unusual for the weighted average call rate to trade closer to the RBI's Standing Deposit Facility rate in surplus liquidity conditions, and that variable rate repo or variable rate reverse repo auctions would not impact durable liquidity. Malhotra made thise comments in an interview with Business Standard, published on Tuesday. The governor's comments provided clarity to traders' doubts of the central bank's policy moves, but the expected rise in prices is seen marginal and bonds are expected to continue trading in a range in the near term, dealers said. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.20-6.30% during the day. The gilt ended at INR 100.41 or 6.27% yield on Monday. For the most-traded and erstwhile 10-year benchmark, 6.79%, 2034 gilt, traders expect a range of 6.28-6.36%. The 2034 gilt closed at INR 103.21 or 6.33% yield the previous session.

Traders may also take cues from the result of the weekly state bond auction. The Reserve Bank of India Friday said four states would raise INR 85.00 billion at the state bond auction Tuesday, sharply lower than the indicated amount of INR 242.00 billion. Long-term bond prices were up Monday due to the reduced state bond supply. Spreads between state bonds and gilts are expected to compress at the auction, dealers said. 

Gains may be capped due to the ongoing conflict between Iran and Israel, dealers said. US President Donald Trump on Tuesday called for the immediate evacuation of Iran's capital, Tehran. Brent crude for August delivery was at $74.50 a barrel at 0830 IST, slightly higher than $73.49 a barrel at 1700 IST Monday.  (Cassandra Carvalho)

End

US$1 = INR 86.24

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

Edited by Rajeev Pai

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