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Informist, Friday, Jul. 11, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended on a mixed note. Most bonds reversed early losses after the result of the INR-250-billion weekly gilt auction showed firm demand. Prices of long-term gilts surged as traders covered intraday short sales after the result, with the cut-off price on the 7.09%, 2054 gilt sharply higher than expected, dealers said. Short-term bonds ended lower as money market rates rose after the Reserve Bank of India conducted an INR-2.50-trillion variable rate reverse repo auction.

The 10-year benchmark 6.33%, 2035 gilt closed at INR 100.21, or 6.30% yield, against INR 100.09, or 6.32%, Thursday. The most-traded 6.79%, 2034 bond closed at INR 102.95, or 6.36%, against INR 102.81, or 6.38%, Thursday. After a stagnant week of trade, volumes picked up Friday in the wake of fresh domestic cues.

Demand for both the new 2032 bond and the 7.09%, 2074 bond was robust, as banks picked up the 2032 bond for their asset and liability management, while insurance companies and provident funds picked up the long-term paper. The RBI set a coupon of 6.28% on the 2032 bond, against an Informist poll estimate of 6.29%. The cut-off price on the 2074 bond was set at INR 99.12, higher than INR 98.91 estimated in an Informist poll.

Traders who had expected to cover their short sales at the auction at a discount to secondary market prices were disappointed and rushed to the secondary market to cover short sales. The RBI accepted only 33 bids, against 335 received, on the 50-year bond. Dealers said a large state-owned life insurer bid aggressively for the 2074 bond as it best matched its liabilities. The insurer was speculated to be bidding in a large quantum at the auction at 1030-1130 IST, similar to last week for the 6.90%, 2065 bond, but was not expected to pick up stock at above-secondary-market prices. The 7.09%, 2074 bond recovered over INR 1 from lows, and ended 90 paise higher at INR 100.05.

"The market was all to one side in the morning, especially on the long-end," a dealer at a primary dealership said. "Everything corrected quickly, and then traders who were short had to buy in the secondary. It was a big surprise that the supply was almost cornered, because the feelers everyone was getting were relatively modest." 

Bond prices had fallen in early trade on caution ahead of the auction and after Bloomberg reported JP Morgan was mulling over reducing the maximum weightage in Government Bond Index – Emerging Market Global Diversified to 8.5% from 10%. India's fully accessible route bonds currently have the maximum 10% weightage. This is likely to hurt incremental foreign investment into gilts, though not much was expected in the coming months as neither the US or India seem likely to cut rates until at least September, dealers said.

Some traders were also sanguine about an immediate impact, noting the move is still at a proposal stage and will only be firmed up in September. Even if the index provider does change the weightage, selling from foreign portfolio investors is unlikely to cross INR 200 billion over a period of a few months, which will be easily absorbed by domestic market participants, dealers said. 

However, a larger-than-expected VRRR auction did impact the prices of short-term gilts, and most of them ended the day with losses. Traders were expecting the RBI to roll over maturing operations worth INR 1.97 trillion, and the notified amount of INR 2.50 trillion was seen as a signal the central bank was not comfortable with overnight call money rates below the policy rate of 5.50%, dealers said. The weighted average call rate was 5.45% Friday, after being as low as 5.26% earlier this week.

The RBI accepted all offers worth INR 1.52 trillion at the INR 2.5 trillion VRRR auction. This was lower than expected and bankers said they held on to cash on the reporting Friday. Moreover, INR 973.15 billion of the maturity was from the two-day, mid-week liquidity mop-up the RBI had conducted Wednesday, and some banks did not want to park it for a week, despite lack of scheduled outflows. Bonds maturing below five years registered losses, but these were limited by purchases from banks and mutual funds as the bonds still provide a spread over the funding rate that was considered lucrative, dealers said. 

"Everyday you look at the spreads, and for an ALM (asset-liability management) desk, it just makes sense to buy," a dealer at a private sector bank said. "You would rather have a decent carry right now rather than try to make money from trading, since it is not going anywhere."

Meanwhile, the spread of the erstwhile 10-year 6.79%, 2034 gilt over the 6.33%, 2035 bond narrowed slightly on Friday to 6 basis points. Traders said the spread had widened due to the uncertainty in the market and because the 2035 bond had been parked by banks in their held-to-maturity portfolios with a lack of free float, despite its INR-900-billion outstanding. On a day where bond prices rise, the 2034 bond is likely to continue outperforming the 2035 bond as traders would like to pick up the most-traded bond, which also offers significantly higher returns than the 10-year benchmark gilt, dealers said.

Turnover in the government bond market Friday more than doubled to INR 594.90 billion, from INR 280.30 billion Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the wholesale digital rupee pilot.

OUTLOOK

Gilts are not traded on Saturdays. Bond prices may open slightly lower on Monday after the RBI notified a larger-than-scheduled bond auction by states for Tuesday, dealers said. Twelve states will raise INR 269 billion through bonds on Tuesday, against INR-174-billion scheduled in the states' indicative borrowing calendar for Jul-Sept. However, prices of long-term bonds may continue to rise after firm demand for the 7.09%, 2074 bond at the weekly gilt auction Friday.

Traders are also uncertain about the RBI's liquidity management, with concern that the central bank wants to drive up overnight money market rates and may soon introduce an on-tap VRRR window or daily VRRR auctions, dealers said. This will keep up the pressure on gilts maturing in up to seven years, dealers said.

On other hand, the government's decision to buy back INR 250 billion of gilts maturing in 2026-27 (Apr-Mar) may lend some support to Treasury bills and bonds maturing up to two years, dealers said. The RBI said the government would buy back the 7.27%, 2026, 5.63%, 2026, and 6.99%, 2026 gilts on Thursday.

Dealers will also look forward to inflation data for June, scheduled at 1600 IST Monday. India's CPI inflation likely fell to its lowest level in over six years in June on the back of statistical effect of a high base and relatively low food prices. According to an Informist poll of 16 economists, headline inflation in June is seen falling to 2.3%, the lowest level since January 2019. Traders have discounted benign inflation prints until September, and bond prices are not likely to move up unless CPI inflation is below 2%, dealers said.

Traders also 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. 

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. It was set below the Standing Deposit Facility rate of 5.25% on Monday and Tuesday, but rose to 5.39% Friday.

On the global front, the movement in US Treasury yields and crude oil prices over the weekend, may lend cues, dealers said. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.26-6.34% Monday and that on the most-traded 6.79%, 2034 bond is seen at 6.32-6.40%.

India Gilts: Up as auction cut-offs better than view; long-term gilts surge

MUMBAI--1503 IST--Prices of government bonds were up after cut-offs at the weekly gilt auction were better than expectations, dealers said. State-owned banks bought gilts at levels seen lucrative after the yield on the 6.79%, 2034 gilt hit the key 6.40% level earlier in the day, dealers said.

Demand for both the new 2032 bond and the 7.09%, 2074 bond was robust, as banks picked up the 2032 bond for their asset and liability management, while insurance companies and provident funds picked up the long-term paper. The RBI set a coupon of 6.28% on the 2032 bond, against an Informist poll estimate of 6.29%. The cut-off price on the 2074 bond was set at INR 99.12, higher than INR 98.91 estimated in an Informist poll.

Closer to the auction result, traders had expected that the cut-offs could be better than initially estimated as sentiment improved and demand from long-term investors was seen firm. Demand for the long-term bond was fuelled by purchases worth INR 10 billion to INR 45 billion for forward-rate agreements, and Separate Trading of Registered Interest and Principal of Securities, dealers said. Earlier this week, traders had said that the success of Friday's auction would depend upon purchases for these agreements.

"Long-term is just driven by investor demand, the yields look good to hold but no one would want to take that risk right now," a dealer at a state-owned bank said. "Even the spread on the 2039 paper looks good but that itself no one would want to hold, while the 5-year (6.75%, 2029 gilt) has not moved (down) at all inspite of the VRRR." The 7.09%, 2074 paper last traded at INR 100.01, up 86 paise from Thursday's close, while the 6.75%, 2029 gilt last traded at INR 103.05, up 2 paise from the previous session.

However, despite the strong demand for long-term bonds, the segment did not look appealing to traders, and traders preferred gilts maturing in up to 15 years. Sentiment eased after the knee-jerk reaction to the higher-than-view size of the variable rate reverse repo auction the RBI conducted earlier in the day, and traders were focussed on the auction result, dealers said.

Gains were capped, however, as some traders trimmed positions ahead of the weekend, and due to persistent fears that overnight borrowing rates could rise further due to the RBI's VRRR auctions. The weighted average call rate was 5.47% Friday, up from 5.36% Thursday. The call rate rose above the repo rate to 5.55% earlier in the day, for the first time since the RBI's Monetary Policy Committee cut the repo rate by 50 bps last month. 

Volumes picked up Friday and the turnover in the gilts market was INR 326.60 billion as at 1430 IST, higher than INR 197.35 billion at the same time Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. For the rest of the day, yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28-6.37% and that on the 6.79%, 2034 gilt at 6.33-6.40%.  (Cassandra Carvalho)

India Gilts: Most recover losses; long-tenure bonds up on insurers' demand

India Gilts: Most recover losses; long-tenure bonds up on insurers' demand

MUMBAI--1234 IST--Government bond prices recovered most losses on expectations of better-than-expected cut-off for the new seven-year, 2032 gilt at the auction Friday, dealers said. Demand from insurers for longer-tenure bonds was firm, which helped these bonds to reverse earlier losses, dealers said. However, some bonds remained down after the Reserve Bank of India held INR 2.50 trillion of a seven-day variable rate reverse repo auction Friday, as it pushed up money market rates, dealers said. 

"LIC (Life Insurance Corp. of India) was there at auction (for 7.09%, 2074 bond) and there is good demand for FRA (forward rate agreements) of around INR 45 billion, so we are seeing recovery in the market," a dealer at a primary dealership said. "With the VRRR thing also, people are mostly seeing overnight rates between 5.25% and 5.50% and priced in so the negativity has gone down...auction cut-off could be better (for the new 2032 bond) than earlier expectations." Currently, the weighted average call rate was at 5.49%. 

For the 7.09%, 2074 bond, most banks and traders are expected to refrain from bidding at auction, dealers said. Some primary dealers bid for the 50-year gilt around the yield of 7.20%, hoping to pick up the bond at attractive levels. However, demand from insurers and pension funds is expected to be firm with the current yield of 7.17% on the 50-year bond seen as attractive to buy, dealers said. Demand from insurers for forward rate agreements on the 50-year paper was also likely, they said. Even in the secondary market, demand from insurers for longer-tenure bonds was firm, which helped these bonds to reverse earlier losses, dealers said. 

For the new seven-year gilt at auction, demand from state-owned banks for both their trading and asset-liability management books was seen firm, dealers said. However, due to the VRRR auction Friday, and fears that liquidity in the banking system could further be drained if the central bank chooses to bring further such auctions, traders initially estimated a higher coupon to be set on the new seven-year gilt, they said. However, firm demand from both banks and mutual funds was seen at the auction, which some dealers said could lead to a better cut-off at the auction. The new 2032 gilt was traded at 6.27% in the when-issued segment of RBI's Negotiated Dealing System-Order Matching platform, while an Informist poll expected the coupon to be set at 6.29%. Demand for Separate Trading of Registered Interest and Principal of Securities, or STRIPS, was also likely for the seven-year gilt, dealers said. 

State-owned banks buying in the secondary market as well as some traders covering short bets placed before the gilt auction also helped prices to recover, dealers said. Traders found yield levels attractive to buy, with the yield on the erstwhile 10-year benchmark 6.79%, 2034 bond rising above 6.40% earlier in the day, they said.

Turnover in the gilts market was INR 205.60 billion as at 1230 IST, higher than INR 129.60 billion at the same time 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 6.28-6.37% and that on the 6.79%, 2034 gilt at 6.36-6.42%.  (Srijita Bose)

India Gilts: Down on large VRRR amount, likely JP Morgan index rejig

MUMBAI--0955 IST--Government bond prices were down Friday as the INR 2.50-trillion variable rate reverse repo auction announced by the Reserve Bank of India is higher than market's expectations, dealers said. Reports that JP Morgan is considering reducing the weightage of India bonds in its Emerging Market Global Bond Index also led traders to sell gilts, they said.

"The JP Morgan news is certainly a dampener, some is also because of the VRRR size," a dealer at a private sector bank said. "But I think auction should sail through because these levels are good."

Indian bonds have a 10% weight in JP Morgan emerging market bond index and reports said the weightage could be cut to 8.5%. Rise in the 10-year benchmark US Treasury yield to 4.37% from 4.34% at 1700 IST Thursday also likely led foreign and private sector banks to sell gilts, dealers said. Meanwhile, state-owned banks likely bought gilts as they found the yield levels attractive, and this limited the fall, dealers said.

Traders were expecting the RBI to roll over INR 1.97 trillion of VRRR auctions that are set to reverse Friday. However, the quantum of the VRRR auction Friday is higher than the INR 2.00-trillion that traders had anticipated and this drove overnight money market rates higher. The weighted average call rate was at 5.51%, the highest since the RBI's Monetary Policy Committee slashed the repo rate to 5.50%. Following the VRRR auction, liquidity surplus in the banking system is expected to drop to INR 1.0 trillion to INR 1.2 trillion, much lower than 1% of banks' net demand and time liabilities of INR 2.31 trillion as on Jun. 13.

Traders also likely placed short bets ahead of the INR 250-billion gilt auction, dealers said. Demand for the new seven-year, 2032 gilt is seen robust in the auction, particularly from state-owned banks for both their trading books and asset-liability management, dealers said. However, long-term investors may demand higher returns for the 50-year, 7.09%, 2074 bond. Demand from insurers for the 50-year gilt is seen firm as the current yield of 7.17% on the bond is seen attractive for them to buy, they said.

Turnover in the gilts market was INR 58.40 billion as at 0930 IST, higher than INR 19.70 billion at the same time 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 6.28-6.37% and that on the 6.79%, 2034 gilt at 6.36-6.42%.  (Srijita Bose)

India Gilts:Seen dn on VRRR announcement, short bets seen before Fri auction

MUMBAI – Government bonds are seen falling after the Reserve Bank of India announced a seven-day, INR 2.50-trillion variable rate reverse repo auction to be held Friday, dealers said. Prices are also seen lower as traders are likely to place short bets ahead of the weekly gilt auction, they said. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen at 6.28-6.37% during the day. On Thursday, the bond ended at INR 100.09, or 6.32% yield. For the erstwhile 10-year benchmark 6.79%, 2034 gilt, traders expect a yield range of 6.36-6.42%. The 2034 gilt closed at INR 102.81, or 6.38% yield Thursday.

Traders were expecting the RBI to roll over the maturity of INR 1.97-trillion auctions which will reverse Friday. However, the quantum is higher than the INR-2.00-trillion that traders had anticipated and may drive up overnight money market rates further, dealers said. With Friday's VRRR auction, liquidity surplus in the banking system is expected to drop to around INR 1 trillion to INR 1.2 trillion, much lower than 1% of banks' net demand and time liabilities, which was at INR 2.31 trillion as on Jun. 13. Traders will keenly track movement in overnight rates, which could lend cues to shorter tenure bonds during the day, dealers said.

At the INR-250-billion weekly gilt auction, the government will sell INR 110 billion of a new seven-year, 2032 gilt and INR 140 billion of the 7.09%, 2074 bond. Demand for the seven-year gilt is seen robust, particularly from state-owned banks for both their trading books and asset-liability management, dealers said. However, demand from long-term investors for the 50-year bond is not seen robust and investors may demand higher returns to pick up the bond at auction. The bond's closing yield on Thursday, at 7.15%, was cited as lucrative by some life insurers.

Traders are also waiting for a preliminary trade deal by the US and India. Some foreign portfolio investors and foreign banks may also sell gilts Friday after reports said that JP Morgan is mulling to cut the weightage of India bonds in its emerging-market index.  (Srijita Bose)

End

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

Edited by Akul Nishant Akhoury

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