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Informist, Wednesday, Sept. 24, 2025

By Cassandra Carvalho

MUMBAI – Prices of government bonds ended lower Wednesday on sales from primary dealerships and foreign portfolio investors, dealers said. Primary dealerships were making room for bonds ahead of the INR-320-billion fresh supply of gilts Friday. Foreign portfolio investors were unwinding bond swap trades placed earlier when yield spreads were wide, dealers said. 

The 10-year benchmark 6.33%, 2035 gilt closed at INR 98.86, or a yield of 6.49%, from INR 98.98 or 6.47% yield Tuesday. As of 1700 IST, foreign portfolio investors net sold gilts worth INR 17.31 billion through the fully accessible route Wednesday, according to data from Clearing Corp. of India.  

The bond swap trade--which involves buying a gilt and paying a fixed rate contract in swaps to take advantage of yield spreads between the two instruments--had gained traction when spreads between the five-year benchmark 6.01%, 2030 gilt and the five-year swap rate was around 55-60 basis points at the end of August, especially from offshore investors. However, the spread compressed to 44 bps Wednesday, so some investors reversed the trade, dealers said.

On the domestic front, primary dealerships were selling gilts before the auction Friday. The government will sell INR 160 billion each of the 6.68%, 2040 bond and the 6.90%, 2065 bond, both of which are relatively longer-term gilts.

"There is some sell-off right now, maybe profit-booking and Friday auction is there right, PDs (primary dealerships) are selling to make room for the 2040 paper and the 40-year paper," a dealer at a state-owned bank said.

Several traders also took the opportunity to book profit nearing the end of the Jul-Sept quarter, as banks would want to show treasury gains in quarterly earnings in a highly volatile period wherein bond yields largely hardened, dealers said. Moreover, the yield on the 10-year benchmark gilt was unable to sustain a fall below the 6.46% level Tuesday, which made it a lucrative level to book profits, they said. Several traders booked profits in the benchmark 5-year, 6.01%, 2030 gilt after a sharp rise in its price this week, they said.

Bond prices opened higher on bets of a soft policy outcome by the Reserve Bank of India's Monetary Policy Committee next week, dealers said. At the outcome, traders expect the tone and commentary of the rate-setting panel and of RBI Governor Sanjay Malhotra to signal scope for a 25-bps rate cut at the panel's meeting in December while some traders are also positioning for a 25-bps rate cut next week itself. Traders expect the RBI to also downgrade its CPI inflation forecast for 2025-26 (Apr-Mar) by 20-40 bps due to the latest rejig in the goods and services tax structure. Some also expect the GDP outlook to be raised due to cuts in GST--which would be a negative for bond prices--while others expect a status quo.  

Due to the positive sentiment ahead of the policy outcome, traders do not expect aggressive short sales even before the fresh supply of long-term bonds Friday. "I doubt any of this (sales Wednesday) is short sales, because if there's a consideration of a cut there won't be aggressive short sales," a dealer at a private sector bank said. 

However, traders are largely uncertain on which tenure across the yield curve they should take up positions in ahead of the policy due to pending release of the Centre's borrowing calendar for Oct-Mar. Traders expect the announcement on either Friday or Monday, and are pricing in a reduction of bonds maturing in 30-50 years to 30-31% from 35% seen in Apr-Sept. This balance supply could either be through Treasury bills or through additional supply in the 5- to 10-year gilt segment, dealers said. Hence, traders are positioning in ultra-short term bonds such as the 8.33%, 2026 bond to avoid risk. The bond was traded for a total amount of INR 5.00 billion on the RBI's Negotiated Dealing System-Order Matching platform Wednesday. Some traders from primary dealerships were also purchasing state bonds maturing in around one year, dealers said. 

The cut-off yields at Wednesday's Treasury bill auction were lower than expected due to demand from mutual funds--which sold T-bills in the secondary market to pick up Wednesday's fresh stock--and traders on rate cut bets. Some traders preferred the higher-yielding 2026 gilt while others preferred Wednesday's T-bills since their maturity was around a quarter-end, which was lucrative for banks, dealers said. The 91-day T-bill will mature on Christmas day, which is a bank holiday, and hence, traders would make a profit since its maturity would be pushed later by one day, a dealer at a state-owned bank said. 

Turnover in the government bond market was INR 510.80 billion, slightly lower than INR 592.65 billion Tuesday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trade using the wholesale digital rupee pilot Wednesday while there were two trades Tuesday worth INR 250 million in the 10-year benchmark using this method. 

OUTLOOK

Thursday, bonds may take cues from the overnight movement in US Treasury yields and the movement in the rupee against the dollar at market open, dealers said. However, positive sentiment may push prices up later in the day as traders are optimistic the RBI's rate-setting panel could open the door to further rate cuts next week, either by raising concern about India's growth prospects amid external headwinds or cutting the CPI inflation forecasts further. As caution sets in before the policy outcome, traders are seen preferring the liquid 10-year benchmark bond over the relatively illiquid bonds, dealers said. 

Traders may refrain from aggressively placing bets with the release of the gilt borrowing calendar for Oct-Mar, seen as the next cue for the market. The calendar is expected to be released Friday or early next week. However, purchases of longer-term bonds may pick up on expectation of lower supply in the segment in the second half of the financial year, dealers said. 

Traders may also take cues from developments on the India-US trade talks. Bond traders may also track the movement of crude oil prices. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.42-6.52%.

India Gilts: Down as PDs, FPIs likely book profits; bank buys may limit loss

India Gilts: Down as PDs, FPIs likely book profits; bank buys may limit loss

MUMBAI--1615 IST--Prices of government bond prices fell due to likely profit booking by primary dealers and foreign portfolio investors, dealers said. However, a sharp fall in prices is unlikely as state-owned banks are likely to step up buys if the yield on the 10-year benchmark 6.33%, 2035 bond tops 6.49%. 

Traders attributed the sales by foreign portfolio investors to unwinding of earlier placed bets in overnight indexed swap rates, dealers said. Traders had earlier entered into "bond-swaps" by buying the five-year benchmark 6.01%, 2030 bond and simultaneously paying fixed rates on the five-year OIS, with the view that the yield arbitrage betweeen the two would widen. However, as the yield spread between the two fell to 43 basis points from nearly 56 bps on Sept. 10, traders unwound earlier bets, dealers said.

"The market is down because people are just taking out profits. There is not a lot of value left anywhere unless the RBI (Reserve Bank of India) cuts rates," a dealer at a foreign bank said. "A lot of FPIs do bond-swaps, and the spread in the five-year has fallen from 60 bps to 42, 43 bps now. So they are cutting (positions)."

Traders waited for fresh cues after gilts rose in most of the sessions last week, dealers said. Traders refrained from placing large and aggressive bets ahead of the Reserve Bank of India's Monetary Policy Committee meeting outcome next week. If the Monetary Policy Committee cuts rates by 25 basis points, traders expect the yield curve to steepen. However, most traders expect only another 25-50 bps cut in the repo rate after the the RBI's rate-setting panel has already delivered a 100 bps cut from February through June. 

Traders also turned cautious ahead of the release of the government's Oct-Mar borrowing calendar for gilts. Traders widely expect share of longer tenure bonds to be cut while supply of shorter tenure bonds may increase. Meanwhile, some traders expect a higher supply of state bonds in the second half of 2025-26 (Apr-Mar), dealers said. 

State-owned banks continued to switch between gilts to generate higher profits as the September quarter-end neared, dealers said. Meanwhile, primary dealers sold bonds ahead of the last gilt auction of the quarter of INR 320 billion, dealers said. 

The turnover in the gilts market was INR 431.60 billion at 1615 IST, lower than INR 530.05 billion at 1635 IST 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 6.45-6.55%. (Muskan Lodhi)

India Gilts: In thin band after early volatility; MPC meet next week awaited

MUMBAI--1305 IST--Government bond prices settled in a thin band after early volatility amid a lack of fresh domestic cues, dealers said. Traders were looking ahead to the Monetary Policy Committee's three-day meeting starting Monday for the next significant trigger on interest rates.

Some traders said gilt prices may rise in the second half of 2025-26 (Apr-Mar) since the cut-off yields on Treasury bills at Wednesday's auction were lower than expected, reflecting firm demand as a section of the market expects the Monetary Policy Committee to cut rates next week. In an Informist poll, the majority of economists said the panel is likely to keep interest rates on hold for the second consecutive meeting next month after the GDP grew much quicker than expected in the June quarter. However, four of the 15 economists polled said they expected a 25-basis-point rate cut. 

Even with this optimism, a wave of profit booking capped the gains in government bond prices. Weakness in the rupee against the dollar also weighed on sentiment, as the currency trading near a record low is seen as a deterrent to the RBI cutting rates, dealers said. 

Shorter-tenure bonds have been outperforming their longer-tenure counterparts over the past week despite expectations that their share of supply will increase in the Oct-Mar borrowing calendar, which is expected this week. The wider spread of the long-tenure gilt yields over the short-term bonds could now bring an end to the outperformance, dealers said. The 6.01%, 2030 gilt's yield is unlikely to fall below 6.10% before the policy outcome, against 6.14% Wednesday.

The consensus view is that RBI Governor Sanjay Malhotra's policy statement is likely to have a softer tone, with CPI inflation expected to be below the central bank's latest forecast of 3.1% for FY26. This could pave the way for a rate cut at the December meeting, once more data points are available. CPI inflation trending lower in the coming months and the US tariff impact on Jul-Sept GDP growth may both be conducive to a rate cut, dealers said.  

The turnover in the gilts market was INR 239.35 billion, similar to INR 246.00 billion at 1330 IST 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 6.45-6.55%. (Janwee Prajapati)

India Gilts: Erase gains on profit booking; up earlier on Oct rate cut hope

India Gilts: Erase gains on profit booking; up earlier on Oct rate cut hope

MUMBAI--1004 IST--Government bond prices were off highs as traders booked profits on their gilt holdings after an early rise Wednesday. Gilt prices had risen as traders increased their bets on the Reserve Bank of India's Monetary Policy Committee cutting the repo rate by 25 basis points next week, dealers said.

A section of the market has been picking up bonds over the last few days expecting the MPC to cut rates again, after a pause in the August policy meet and 100 bps of rate reduction between February and June. A bulk of this has come from private sector banks, dealers said. Private sector banks bought INR 87.84 billion of gilts in the secondary market between Friday and Tuesday, according to Clearing Corp. of India data. Some of these traders may have trimmed their holdings as the 10-year gilt yield dipped below 6.46%. The market expects the 6.33%, 2035 bond's yield to hold in a 6.44-6.52% band before the policy outcome on Oct. 1.

The consensus view remains that the tone and commentary of RBI Governor Sanjay Malhotra in the policy statement will be softer as CPI inflation is set to undershoot the central bank's latest forecast of 3.1% on average for 2025-26 (Apr-Mar). This could set the stage for policy easing at the committee's next meeting in December, especially with further data points in hand. This will include a potential fall in inflation due to goods and services tax rationalisation that started this week, and the impact of US tariffs on the Jul-Sept GDP print to be released November end.

Traders do not expect any domestic cues on interest rates before the policy outcome and therefore, they will have to take position with existing information in hand, dealers said. The government's Oct-Mar borrowing calendar before the policy outcome, and one gilt and state bond auction each may cap any sharp rise in prices even if optimism builds ahead of the policy, they said.

"There are no fresh cues in the market to record any significant movement," a dealer at a private-sector bank said. "Any movement recorded in the day will be purely intraday trading activity."

The turnover in the gilts market was INR 57.90 billion, higher than INR 29.10 billion at 0930 IST 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 6.45-6.55%. (Janwee Prajapati)

India Gilts: Seen steady Wed, bets of soft MPC outcome next wk to aid prices

MUMBAI – Prices of government bonds are seen opening steady Wednesday with a positive bias, dealers said. Positive sentiment ahead of the outcome of the Reserve Bank of India's Monetary Policy Committee meeting next week may lead to an upward bias in prices, dealers said. 

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen moving in a range of 6.44-6.50% during the day. On Tuesday, the bond ended at INR 98.98 or 6.47% yield. The yield on the benchmark US 10-year Treasury note was 4.12% as of 0800 IST, a tad lower than 4.14% at 1700 IST Tuesday.

Bond prices may track the movement of the rupee against the dollar as the local currency is seen depreciating further after hitting a record low of 88.7975 per dollar Tuesday. However, prices are expected to be buoyed by expectations of a softer stance by the MPC at its meeting next week. Some traders expect the rate-setting panel to cut the repo rate by 25 basis points next week, while others expect the tone and commentary of RBI Governor Sanjay Malhotra and the policy statement to set the stage for policy easing at the committee's meeting in December. 

The RBI's consistent support through variable rate repo auctions to ease pressure on liquidity in the banking system is also seen as a positive for gilt prices, dealers said. As per latest data from the central bank, the net liquidity injected by the central bank – a proxy for the systemic liquidity deficit – was INR 319.87 billion Monday, the highest since Mar. 26. On Sunday, the net liquidity absorbed by the central bank was INR 70.72 billion.(Cassandra Carvalho)

End

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

Edited by Subhojit Sarkar

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