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Informist, Wednesday, Jun. 25, 2025

By Srijita Bose

MUMBAI – Government bond prices ended sharply lower Wednesday after the Reserve Bank of India announced a variable rate reverse repo auction, the first such auction since November. Traders also placed short bets before the weekly auction worth INR 360 billion on Friday, dealers said. 

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.30, or 6.29% yield, against INR 100.57, or 6.25%, on Tuesday. The most-traded 6.79%, 2034 bond closed at INR 103.93, or 6.37%, against INR 103.12, or 6.34% on Tuesday.

Though most traders were of the view that the VRRR auction to be conducted Friday will not materially impact liquidity in the banking system, they sold bonds due to fear that the auction could be a step towards raising overnight rates closer to the repo rate, dealers said. Foreign banks and private sector banks were likely to have sold after buying gilts Tuesday, they said.

"VRRR auction was a surprise, so a knee-jerk reaction was there, but there could be more VRRRs on the way. So, that's why the market is giving in," a dealer at a state-owned bank said. "There were also short sales for the auction, but I think there should be some flattening (in the yield curve) around these levels."

With the current liquidity surplus, the INR 1 trillion VRRR auction on Friday will have a negligible impact on overnight rates, dealers said. As per the latest data from the RBI, the net liquidity absorbed by the central bank--a proxy for systemic liquidity surplus--stood at INR 2.59 trillion, slightly higher than INR 2.44 trillion on Monday. However, yields on short-term securities such as T-bills and gilts maturing in up to five years are expected to trade higher if the RBI continues with operations to drain liquidity, dealers said. Bonds maturing less than five years were the worst hit Wednesday, with the yield on the 7.38%, 2027 bond rising by 5 basis points from the previous close. Most expect the yield curve to flatten slightly, though some traders still prefer the shorter end due to the lucrative levels it currently offers, as the curve is likely to steepen again by September end when rate cut expectations resurface.  

Traders continued to place short bets due to expectations that cut-off prices at the weekly auction would be lower, dealers said. Due to the surge in short bets placed on the 10-year benchmark 6.33%, 2035 gilt over the past week, many remained uncovered despite a sharp rise in prices on Tuesday. 

Despite the 2035 bond's outstanding of only INR 600 billion, trades in the paper in the repo market surged as traders made room for the supply of INR 300 billion of the bond on Friday. A low outstanding of the 2035 gilt led the short-sellers to lend funds at a weighted average rate of 0.5% in the special repo segment of the Clearcorp Repo Order Matching System. This led to the spread between the 6.33%, 2035 gilt and the 6.79%, 2034 gilt narrowing to less than 8 bps from 9 bps Tuesday. However, the spread was still too large and is likely to compress to 3-5 bps after the auction of the 10-year benchmark on Friday, and 3-4 bps in the near term, dealers said. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data showed at 1720 IST trades worth INR 111.35 billion in the 6.33%, 2035 gilt, and INR 130.03 billion worth of trades on 6.79%, 2034 bond. The data on Tuesday showed trades worth INR 117.07 billion on the 10-year benchmark paper and INR 151.11 billion in the 6.79%, 2034 gilt.

Some traders also placed short bets in shorter-tenure bonds to make room for INR 60 billion of the new 2028 bond on Friday, dealers said. The fall in the rupee to an intraday low of 86.1325 against the dollar Wednesday also contributed to the fall in gilts, dealers said. However, losses were limited due to moderation in crude oil prices and US Treasury yields. With the Israel-Iran conflict likely near a close, the Brent crude oil for August delivery fell to $67.56 at 1700 IST from $69.15 at the same time Tuesday. The 10-year US yield was at 4.29%, down from 4.33% at 1700 IST Tuesday. Traders, especially from state-owned banks, found yield levels of 6.36-6.37% on the 6.79%, 2034 gilt lucrative to buy gilts, limiting losses, dealers said. 

Meanwhile, mutual funds and private sector banks are likely to have sold longer tenure bonds as sentiment dampened owing to the VRRR auction, dealers said. "Selling in long-term (bonds) today was not from (long-term) investors," a dealer at a primary dealership said. "Many people had bought these tenures due to good yield spreads, but some were stuck with short-term today and were selling long-term."

At the Treasury bill auction Wednesday, cut-offs were largely on expected lines, dealers said. Traders had initially expected cut-off yields at the Treasury bill auction to be at least 10 to 15 bps higher than last week's cut-offs. However, at the auction, the cut-offs were only 5-8 bps higher, as traders assessed that the VRRR auction Friday would not have a significant impact on durable liquidity. Mutual funds and state-owned banks got most of the stock, dealers said.

Turnover in the gilts market was INR 485.10 billion, lower than INR 604.00 billion Tuesday, according to data on the RBI's NDS-OM platform. There were two trades in the 7.10%, 2034 bond worth INR 100 million using the wholesale digital rupee pilot on Wednesday, the same as Tuesday.

OUTLOOK

On Thursday, bonds may take cues from US yields at open after the release of economic data and comments from Federal Reserve officials. Prices may remain lower as the RBI has announced the VRRR auction. Short-term bonds maturing in up to five years may remain down on fears that more VRRR auctions could be on the way, dealers said. 

Gilts will also take cues from developments in the Israel-Iran conflict, dealers said. Traders now await the weekly gilt auction Friday, which will be the 2035 gilt's third auction. The result of the VRRR auction will also be closely tracked for cues. Some traders expect almost full subscription, while others said that Thursday's liquidity data would provide a better picture of the cut-off and subscription since banks may not want to park funds for seven days with the RBI at the end of the June quarter. 

The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.26-6.35% Thursday and that on the most-traded 6.79%, 2034 bond is seen at 6.33-6.40%.

India Gilts: Fall more on short bets before auction Fri, fall in rupee

MUMBAI--1548 IST--Government bond prices fell more, tracking a fall in the rupee against the dollar, dealers said. Traders also sold bonds due to fear that the variable rate reverse repo auction scheduled for Friday could be a step towards raising overnight rates closer to the repo rate. Traders also placed short bets before the weekly auction worth INR 360 billion on Friday, dealers said. 

"The VRRR auction Friday will not impact overnight rates much because of month-end inflows, but this could be a start if RBI wants to align the (overnight) rates near repo (rate)," a dealer at a private sector bank said. "There should be some flatenning at these levels but some people who were heavy on positions are cutting some of them...there are also shorts for the auction."

The rupee fell to an intraday low of 86.1325 against the dollar Wednesday, which contributed to the fall in gilts, dealers said. 

While traders were likely to have covered some short bets earlier in the day, others placed short bets due to expectations that cut-off prices at the auction would be lower, dealers said. They added that due to a surge in short bets placed on the 10-year benchmark 6.33%, 2035 gilt over the past week, many remained uncovered Wednesday. A proxy for tracking short sales in a particular bond is the number of trades in the paper in the special repo segment of the Clearcorp Repo Order Matching System. The data at 1522 IST showed trades worth INR 111.35 billion in the 6.33%, 2035 gilt, and INR 130.03 billion worth of trades on 6.79%, 2034 bond. The data on Tuesday showed trades worth INR 117.07 billion on the 10-year benchmark paper and INR 151.11 billion in the 6.79%, 2034 gilt.

Despite the 2035 bond's outstanding of only INR 600 billion, trades in the paper in the repo market surged as traders made room for supply of INR 300 billion of the bond on Friday. Traders expect cut-off prices at the auction to be lower than current market prices. The when-issued section of RBI's Negotiated Dealing System-Order Matching platform showed one trade on the 6.33%, 2035 bond worth INR 1 billion, traded at INR 100.31. 

Some traders also placed short bets in shorter-tenure bonds to make room for INR 60 billion of the new 2028 bond on Friday, dealers said. Most, however, said that shorter tenure bonds remained down on fears that the RBI could announce more VRRR auctions. Meanwhile, the yield on the 7.09%, 2054 bond and the 7.34%, 2064 bond were 5 basis points higher than Tuesday's close. Mutual funds are likely to have sold these longer tenure bonds as sentimant dampened owing to the VRRR auction, dealers said. 

The turnover in the gilts market was INR 365.50 billion at 1530 IST, slightly lower than INR 405.40 billion at the same time Tuesday, 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 6.25-6.32%. For the 6.79%, 2034 gilt, dealers see the yield at 6.33-6.40%.  (Srijita Bose)

India Gilts: Remain down; T-bill auction cut-offs largely on expected lines

MUMBAI--1312 IST--Prices of government bonds remained down as traders, especially those from private sector and foreign banks, sold gilts, dealers said. The cut-off yields at the Treasury bill auction were largely along expected lines, and much lower than what traders had expected at market open. Fears of a rise in borrowing rates after the Reserve Bank of India's variable rate reverse repo auction announcement subsided. The sentiment was aided by an ease in crude oil prices and US Treasury yields.

Earlier in the day, traders expected cut-off yields at the Treasury bill auction to be at least 10 to 15 basis points higher than last week's cut-offs. However, closer to the auction, bids were 5-7 bps higher, as traders assessed that the VRRR auction would not have a significant impact on durable liquidity. The RBI set a cut-off of 5.41% on the 91-day paper, compared with an Informist poll estimate of 5.42%. The cut-off yield on the 182-day paper was 5.54% against 5.51% estimated, while that on the 364-day bill was 5.57% against a 5.55% estimated. Mutual funds and state-owned banks got most of the stock, dealers said. 

"The VRRR is only temporary drain and government expenditure of around (INR) 1.5 to 2 lakh crore (trillion) will come starting tomorrow (Thursday) so even if (INR) 1 lakh crore (trillion) goes out it won't make much of a difference," a dealer at a state-owned bank said. "But market realised that a little later, the knee-jerk reaction was to sell but that panic-selling wasn't there."

However, yields on short-term securities such as T-bills and gilts maturing in up to 5 years are expected to trade higher if the RBI continues with operations to drain liquidity, dealers said. The yield curve is expected to flatten slightly, though some traders still prefer the shorter-end of the yield curve due to the lucrative levels it currently offers, with the view that the curve will steepen again when rate cut expectations re-surface.

Earlier in the day, traders covered short bets in the 6.33%, 2035 gilt. Primary dealerships, private sector and foreign banks which had placed short bets on the gilt Tuesday had to cover these bets, but the low outstanding of the gilt of INR 600.00 billion led the short-sellers to lend funds at a weighted average rate of 0.5% in the special repo segment of the Clearcorp Repo Order Matching System. This led to the spread between the 6.33%, 2035 gilt and the 6.79%, 2034 gilt narrowing to 8 basis points from 9 bps Tuesday. However, the spread was still too large and would compress to 6-7 bps after the former's auction on Friday, and 3-4 bps in the near term, dealers said. Short bets on both gilts add up to around INR 240 billion, as per the special repo segment of the Clearcorp Repo Order Matching System — which is a proxy for tracking short sales. 

Traders, especially from state-owned banks, found current yield levels of 6.36-6.37% on the 6.79%, 2034 gilt lucrative to buy gilts. Traders now await the weekly gilt auction Friday, which will be the 2035 gilt's third auction. The result of the VRRR auction will also be closely tracked for cues. Some traders expect almost full subscription, while others said that Thursday's liquidity data would provide a better picture on the cut-off and subscription since banks may not want to park funds for seven days with the RBI at the end of the June quarter. 

The turnover in the gilts market was INR 239.10 billion at 1230 IST, slightly lower than INR 296.20 billion at the same time Tuesday, 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 6.22-6.30%. For the 6.79%, 2034 gilt, dealers see the yield at 6.30-6.40%. (Cassandra Carvalho)

India Gilts: Recover some losses as VRRR shock ebbs; fall in oil, US ylds aid

MUMBAI--0947 IST--Prices of government bonds recovered some losses after opening sharply lower as shock at the Reserve Bank of India's variable rate reverse repo auction announcement ebbed. Overnight money market rates are expected to be little changed after the VRRR auction as inflows from the central government's month-end expenditure would add to the liquidity surplus in the banking system, dealers said. Easing of crude oil prices and US Treasury yields overnight also helped the recovery in prices. 

After market hours Tuesday, the Reserve Bank of India announced a seven-day variable rate reverse repo auction for INR 1.00 trillion on Friday. Brent crude for August delivery was at $68.07 a barrel, against $69.15 a barrel at 1700 IST Tuesday. The yield on the benchmark 10-year US Treasury note was 4.30%, down from 4.34% at 1700 IST Tuesday.

"I don't understand why 10-year (gilt) should see such a sell-off for a liquidity move (from the RBI)," a dealer at a private sector bank said. "Market was already pricing in (overnight rates trending towards) 5.50% and TREPS will max (maximum) go to 5.20% from 5.10% earlier. We're still in comfortable liquidity even if RBI withdraws INR 1 trillion (through the VRRR) because government month-end spending will come."

Durable liquidity in the system is still seen in surplus after the RBI's VRRR announcement, dealers said. As per latest data from the RBI, the net liquidity absorbed by the central bank--a proxy for systemic liquidity surplus--stood at at INR 2.59 trillion, slightly higher from INR 2.44 trillion on Monday. Traders also covered short bets in the 6.33%, 2035 gilt as the rate in the special repo segment of the Clearcorp Repo Order Matching System — which is a proxy for tracking short sales in a particular bond – fell as low as 0.01% on the gilt, a dealer said. On Tuesday, traders had expected the yield on the 2035 gilt to fall to the key 6.22% level in the near-term after hitting 6.25% Tuesday. 

Due to short-covering, prices of gilts maturing in 10 years and above recovered slightly. However, prices of short-term gilts remained down. The yield of the 5-year 6.75%, 2029 gilt was 3 basis points higher than Tuesday's close at 6.02%. Yields on Treasury bills at the weekly auction are also expected to be higher by around 10-15 basis points from last week's cut-offs.  

The turnover in the gilts market was INR 108.85 billion at 0930 IST, slightly lower than INR 124.20 billion at the same time Tuesday, 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 6.22-6.30%. For the 6.79%, 2034 gilt, dealers see the yield at 6.30-6.40%. (Cassandra Carvalho)

India Gilts: Seen sharply down after RBI announces INR-1-tln VRRR auction

MUMBAI – Prices of government bonds are seen opening sharply lower Wednesday after the Reserve Bank of India, post market hours Tuesday, announced a seven-day variable rate reverse repo auction for INR 1.00 trillion on Friday, dealers said. Short-term bond prices are seen falling the most due to the drain on transient liquidity that the VRRR would bring. The central bank also said it would not conduct the 14-day main operation for the coming fortnight on a review of evolving liquidity conditions.

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.24-6.32% during the day. The gilt is seen opening around 2-3 basis points higher Wednesday. The gilt ended at INR 100.57 or 6.25% yield on Tuesday. For the most-traded and erstwhile 10-year benchmark, 6.79%, 2034 gilt, traders expect a range of 6.33-6.40%. The 2034 gilt closed at INR 103.12 or 6.34% yield the previous session. The 5-year 6.75%, 2029 gilt yield is seen rising by around 5 bps. At the Treasury bill auction of INR 190 billion, cut-off yields are seen rising 10-15 basis points from last week's cut-offs due to the announcement of the VRRR. Prices may fall further during the day, since bond traders were not expecting a VRRR announcement so soon, dealers said. 

This is the first VRRR auction since Nov. 29. Earlier this month, bond prices fell sharply on fears of restrictive monetary policy after Reuters cited a source aware of the central bank's thinking, saying "the RBI could start conducting variable rate reverse repo auctions to suck out surplus liquidity as and when required". On Jun. 6, the RBI's Monetary Policy Committee unexpectedly reverted its stance to 'neutral' from 'accomodative'.

Liquidity in the banking system has remained in excess of 1% of banks' net demand and time liabilities despite scheduled outflows for advance tax and goods and services tax over the past 10 days. Despite this, the RBI's net liquidity absorbed from the banking system--a proxy for the systemic liquidity surplus--was INR 2.44 trillion on Monday.

Though a few money market traders had expected the RBI to come up with a VRRR auction, most said such an announcement could come only next month, with outflows scheduled near the end of the June quarter. Bond traders had not expected such an announcement in at least the next three-six months, they said. 

Traders are likely to dismiss global and geopolitical cues due to the strong signal on domestic monetary policy from the RBI, dealers said. Brent crude for August delivery was at $67.94 a barrel, against $69.15 a barrel at 1700 IST Tuesday. The yield on the benchmark 10-year US Treasury note was 4.31% at 0830 IST, down from 4.34% at 1700 IST Tuesday. US Federal Reserve Board Chair Jerome Powell, while presenting the Monetary Policy Report to the US House Financial Services Committee, said the US Federal Open Market Committee was in no hurry to cut interest rates. (Cassandra Carvalho)

End

US$1 = INR 86.09

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

Edited by Saji George Titus

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