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Informist, Wednesday, Jul. 9, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended lower after the Reserve Bank of India's two-day variable rate reverse repo auction Wednesday drove up overnight money market rates and the cost of funding for banks. Losses in short-term bonds were limited as traders had anticipated the step Tuesday. Bond prices recovered some losses due to the recovery in the rupee from a sharp fall earlier in the day, but the uncertainty of the RBI's liquidity management steps continued to weigh on the market.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.11, or 6.31% yield, against INR 100.17, or 6.31%, Tuesday. The benchmark's yield ended at its highest level since Jun. 30. The most-traded 6.79%, 2034 bond closed at INR 102.82, or 6.38%, against INR 102.91, or 6.37%, Tuesday. Trade volumes remained dull for the third straight day.

The RBI held an INR 1.00-trillion, two-day VRRR auction at 1000-1030 IST, which pushed the Secured Overnight Rupee Rate--a new benchmark for the collateralised funding markets in India--up 17 basis points from the previous day to 5.32%. The rate is representative of banks' funding costs as the collateralised market makes up over 95% of the money market volumes. Despite this, rate-sensitive short-term bonds did not fall sharply as traders had anticipated the RBI would announce more measures to mop up banking system liquidity, which was in a surplus well above the comfort zone of 1% of banks' net demand and time liabilities that RBI Governor Sanjay Malhotra had indicated in April, dealers said.

Some dealers expect the central bank to announce daily VRRR auctions in the near term. However, until the liquidity surplus comes down to around INR 2.00 trillion, money market rates are unlikely to rise significantly closer to the repo rate, which might limit downward movement in bond prices if such a measure is introduced, dealers said.

However, with Wednesday's VRRR auction, dealers said the RBI had sent a strong signal that it wants money market rates to be between the standing deposit facility rate of 5.25% and the policy repo rate of 5.50%. The lack of action Monday and Tuesday on liquidity had led some traders to expect that the central bank would not move to short-term VRRR auctions. It has held seven-day, INR 1.00-trillion auctions on each of the last two Fridays. Traders preferred to shed risk in bonds maturing in 10 years or more as there were no incremental positives to look forward to, dealers said.

"The curve is relatively flat now, considering the view of no further rate cuts has played out," a dealer at a primary dealership said. "The short end is still getting support because people don't want to take on duration risk, and supply will eventually push yields higher."

Bonds maturing in 10-15 years also fell owing to the relatively high yield on the 10-year US Treasury note at 4.40%, which was driving foreign investors away from emerging market bonds, including India's, dealers said. On the other hand, some traders said the spread of the new 6.68%, 2040 bond over the 10-year benchmark gilt was attractive, especially as it seemed to be in favour with state-owned banks for their available-for-sale portfolios, dealers said. The 2040 bond was auctioned for the first time Friday and has been traded more than the erstwhile 15-year 6.92%, 2039 gilt despite an outstanding of only INR 160.00 billion, less than a seventh of the outstanding of the 2039 bond.

Traders also held back from aggressive bets because of continued uncertainty on the India-US "mini" trade deal, which was expected after market hours Tuesday, according to media reports. With the eagerly anticipated deal hanging in the balance for the fourth trading day, some foreign banks may have begun selling bonds, dealers said. India is expected to be among the first economies to sign a deal with the Donald Trump administration after the announcement of reciprocal tariffs. The US president said Monday the US was close to a trade pact with New Delhi.

Roadblocks to a deal include Trump's threats of imposing additional 10% tariff on countries that are part of the BRICS group, which includes India, and on pharmaceutical imports to the US, dealers said. At the same time, if GDP growth takes a hit from the trade and tariffs scenario, traders may ramp up bets that the RBI's Monetary Policy Committee has room to prop up growth by cutting rates in October or in December, they said.

"More than any other macro fundamental, it is the rupee movement which is going to move the market because of the tariff deal," said a dealer at a private-sector bank. "We should have some relief from any major dollar buying if the deal goes through, which will be positive for gilts." A fall in the rupee to near 86 a dollar earlier in the day had led some traders to sell bonds, but the domestic unit recovered all losses by the end of the day to close at 85.67 a dollar.

Turnover in the government bond market Wednesday was INR 320.95 billion, similar to INR 338.00 billion Tuesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades through the wholesale e-rupee pilot for the second straight day.

OUTLOOK
Bond prices may open steady Thursday amid a lack of significant domestic cues as traders await updates on a preliminary US-India trade deal. The movement in US yields after the minutes of the US Federal Open Market Committee meeting are released at 2330 IST Wednesday will be closely tracked, dealers said.

Traders expect the US and India to strike a preliminary trade deal soon. This is likely to help the rupee appreciate and also result in some foreign portfolio investment inflows into both equities and fixed-income, dealers said. However, some of the recent commentary from both sides has not been encouraging, they added. 

The RBI's actions on liquidity are being keenly watched by traders after the central bank held a two-day, INR 1.00-trillion variable rate reverse repo auction Wednesday, which drove up money market rates. Traders now expect the central bank to roll over the maturity of INR 2.00 trillion through a seven-day VRRR auction of around INR 1.50 trillion-INR 2.00 trillion Friday, dealers said.

Traders also await with interest the development of a collateralised money market benchmark. Financial Benchmarks India Ltd. published the new benchmark Secured Overnight Rupee Rate for the first time Monday, and it was set at 5.16%, below the standing deposit facility rate.

Any sharp movement in crude oil prices may also lend cues. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.28-6.35% Thursday and that on the most-traded 6.79%, 2034 bond is seen at 6.35-6.42%.

India Gilts: Remain down in thin trade on fear of more VRRRs, elevated US ylds

MUMBAI--1530 IST--Prices of government bonds remained down in thin trade as fears of further variable rate reverse repo auctions persisted, after the Reserve Bank of India held a two-day VRRR for INR 1.00 trillion earlier in the day, dealers said. US Treasury yields remained elevated and the lack of a trade deal between India and the US also weighed on gilt prices, dealers said.

After the VRRR auction Wednesday, dealers expect more such auctions with the view that the central bank aims to keep overnight money market rates between the standing deposit facility rate and the repo rate, not below the standing deposit facility rate. Some dealers expect the central bank to announce daily VRRR auctions in the near term. However, until the liquidity surplus comes down to around INR 2.00 trillion, money market rates are unlikely to rise significantly closer to the repo rate, which might limit downward movement in bond prices if such a measure is introduced, dealers said. 

"Next week, they might come up with daily VRRRs and the cut-off will be 5.49% at all of them," a dealer at a state-owned bank said. "But the reaction to it (such an announcement) won't be too much in the short term... five-year (gilt yield) can move 2-3 basis (points) but not more than that."

The result of the Treasury bill auction was largely along expected lines, and short-term bond prices also saw only minor losses as dealers were already expecting a VRRR auction. The yield on the 10-year benchmark US Treasury note hovered around 4.40%, and bond yields closely tracked its movement due to lack of any other significant triggers, dealers said.

Some traders were also expecting a trade deal between India and the US to be announced overnight, after media reports said the announcement may come before 2200 IST Tuesday. The lack of the trade deal also weighed on bond prices, dealers said. Traders now await India and the US's CPI data for further cues on the interest rate trajectory in both countries.

Traders preferred the 10-year 6.33%, 2035 gilt and the liquid 6.79%, 2034 bond. However, some played on spreads between gilts across the curve, such as the spreads between the 7.18%, 2033 gilt and 6.68%, 2040 gilt over the 10-year benchmark, dealers said.

At 1530 IST, turnover in the gilts market was INR 249.00 billion, marginally higher than the INR 246.90 billion at the same time Tuesday, 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 6.26-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.34-6.40%.  (Cassandra Carvalho)

India Gilts: Shorter-tenure bonds dn as VRRR seen pushing up money mkt rates

MUMBAI--1210 IST--Most government bond prices fell as the Reserve Bank of India's variable rate reverse repo auction is expected to push up money market rates, dealers said. Shorter tenure bond prices were down more than other gilts due to the VRRR auction, they said. However, losses were limited on the 10-year gilts and they traded in a thin band as traders favoured liquid gilts, dealers said.

Traders sold gilts on expectations that the RBI would aim to keep overnight rates between the Standing Deposit Facility of 5.25% and the repo rate of 5.50%, by conducting further VRRR auctions, dealers said. Due to a comfortable liquidity surplus of INR 3 trillion or more in the banking system since the beginning of the month, money market rates were trading below the repo rate for the most part with the weighted average rates remaining around or below the RBI's SDF rate. Shorter tenure gilts, which are more sensitive to volatility in rates, were down more. However, some still expect a steepening in the yield curve, which limited losses in these papers, they said. 

Higher costs of funding also likely led to a muted demand for Treasury bills at the auction Wednesday, dealers said. While the 91-day T-bill was likely well bid by mutual funds, demand from banks was muted for the 182-day and the 364-day T-bills, they said.

"Banks were going for T-bills because of liquidity also. But now since funding costs are higher and liquidity is also expected to be lesser due to VRRRs there is no point in going aggressive on T-bills," a dealer at a state-owned bank said. "On the secondary side though, the pressure will mostly be on extreme short end bonds...rest still seem good levels to hold." 

FPIs were likely sellers also due to uncertainty over US trade and tariffs, dealers said. Some foreign banks likely also sold gilts after buying INR 49 billion worth of gilts since Jul. 3 on expectations of a bilateral trade agreement between India and the US. However, other foreign banks likely remained on the sidelines hoping for a trade deal between the two countries to be announced soon, dealers said. Traders also await minutes of the US Federal Open Market Committee's latest meeting scheduled later in the day. 

The turnover in the gilts market was INR 104.05 billion at 1130 IST, higher than INR 66.15 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 6.26-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.34-6.40%.  (Srijita Bose)

India Gilts: Steady before VRRR auction; PSU banks' buys limit losses

MUMBAI--0944 IST--Government bond prices were in thin band Wednesday, recovering early losses before the INR 1-trillion, two-day variable rate reverse repo auction. Prices opened lower due to a fall in rupee against the dollar in the early session, dealers said. The Reserve Bank of India's VRRR notice also weighed on prices,  However, losses were limited as state owned banks likely bought at yields seen attractive, they said. 

"The impact of this VRRR on liquidity will not be much and mostly they are going to roll-over these VRRRs rather than bringing in daily VRRRs," a dealer at a state-owned bank said. "So after the knee-jerk reaction, mostly market should be supported...some selling could come from foreign banks and FPIs (foreign portfolio investors) as the US-India deal still has not come." 

Traders will keenly watch overnight rates and any further actions by the RBI on liquidity management, dealers said. On Tuesday, the RBI net absorbed INR 3.07 trillion of liquidity from the banking system. With the VRRR Wednesday, the liquidity surplus is expected to fall slightly below to 1% of net demand and time liabilities of banks, which is around INR 2.31 trillion as of Jun. 13. Despite the drain in liquidity due to VRRR, the surplus is still expected to be comfortable, dealers said. Shorter-tenure gilts fell in early trade on the VRRR notice, however, it later recovered some losses as most traders felt that overnight rates could remain around the RBI's Standing Deposit Facility of 5.25% despite the VRRR auction, they said. The weighted average call rate at 0928 IST was 5.26% on Wednesday. 

The rupee was at INR 85.91 against the dollar, down from 85.70 at close on Tuesday. US President Donald Trump reiterated his call to impose 10% additional tariffs on BRICS countries even as he said the US is close to a trade deal with India. BRICS, originally comprising Brazil, Russia, India, China, and South Africa, expanded to include Egypt, Ethiopia, Iran, and the United Arab Emirates in 2024. Indonesia joined the group this year.

Foreign banks likely sold in early trade in light volumes, dealers said. However, most awaited the bilateral trade agreement between India and the US for cues to trade, thereby limiting sell-off in gilts, they said. 

The turnover in the gilts market was INR 30.45 billion at 0930 IST, similar to INR 31.70 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 6.26-6.35%. For the 6.79%, 2034 gilt, dealers see the yield at 6.34-6.40%.  (Srijita Bose)

India Gilts: Seen down on RBI's VRRR announcement; India-US trade deal eyed

MUMBAI – Government bond prices are seen opening lower after the Reserve Bank of India said it will hold a INR 1-trillion, two-day variable rate reverse repo auction Wednesday, dealers said. Traders also await updates on a preliminary US-India trade deal and the minutes of the US Federal Open Market Committee meeting scheduled later Wednesday, they said. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.26-6.35% during the day. On Tuesday, the bond ended at INR 100.17 or 6.31% yield. For the erstwhile 10-year benchmark 6.79%, 2034 gilt, traders expect a yield range of 6.32-6.40%. The 2034 gilt closed at INR 102.91, or 6.37% yield Tuesday. 

Traders will keenly watch overnight rates and any further actions by the RBI on liquidity management, dealers said. On Monday, the RBI net absorbed INR 3.44 trillion of liquidity from the banking system. With the VRRR Wednesday, the liquidity surplus is expected to be closer to 1% of net demand and time liabilities of banks, which is around INR 2.31 trillion as of Jun. 13. Despite the drain due to VRRR, the liquidity surplus is still expected to be comfortable, which could limit the fall in gilts, dealers said. Traders said their primary concern was whether the central bank would introduce an overnight VRRR window, which would effectively be a rate hike for the market, dealers said. The weighted average call rate has trended near the Standing Deposit Facility rate of 5.25% for the past few days and may trend to the repo rate should the RBI allow banks to park money with it at a rate as high as 5.49%. However, most traders were of the view that the RBI would not come with such a move, and may choose to roll over the VRRRs on Friday, dealers said. 

US President Donald Trump late Tuesday said that there will be no extension of the Aug. 1 deadline for new tariffs. Trump's latest tariff threats include potential tariffs of up to 200% on pharmaceutical exports to the US, but he said he will "give people about a year, year and a half" until the duties are put into effect. Trump also reiterated his call to impose 10% additional tariffs on BRICS countries even as he said the US is close to a trade deal with India.

The rupee could be under pressure and fall against the dollar Wednesday, which in turn could lead to a fall in gilts, dealers said. Further, foreign portfolio investors and foreign banks, who bought gilts in the previous session hoping for a US-India trade deal to be announced Tuesday, may also sell gilts Wednesday, they said. Traders are awaiting the minutes of the US Federal Reserve's latest policy meeting for more insights into the US economy and the central bank's policy path.  (Srijita Bose)

End

US$1 = INR 85.67

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

Edited by Rajeev Pai

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