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Informist, Friday, Oct. 31, 2025

By Aaryan Khanna

NEW DELHI – Government bond prices ended sharply higher, reversing earlier losses after the Reserve Bank of India rejected all bids for the 6.28%, 2032 bond at auction. This was seen as a signal from the central bank about its discomfort with the recent rise in yields and increased traders' hopes that it would follow up with a measure to support bonds, including potential open market operations, dealers said.

The 10-year benchmark 6.33%, 2035 gilt ended at INR 98.59, or 6.53% yield, against 98.30, or 6.57% yield, Thursday. The bond's yield had risen to as high as 6.60%, charting its widest trading range and best recovery since Oct. 1. The on-the-run 10-year 6.48%, 2035 gilt closed at INR 100.06, or 6.47% yield, from INR 99.92, or 6.49% yield, at the previous session.

The government had offered to sell INR 90 billion of the 5.91%, 2028 bond, INR 110 billion of the 6.28%, 2032 bond, INR 70 billion of the 7.24%, 2055 bond, and INR 50 billion of the 6.98%, 2054 green bond Friday. The RBI rejected all bids for the 7-year paper at the auction, likely because bidders demanded higher yields to pick up the bond amid uncertainty on further rate cuts and tight liquidity. With the reduced supply at auction, traders covered short positions built up over the last two days, leading to a sharp rise in gilt prices by the close, dealers said. The 6.48%, 2035 bond underperformed the most-traded gilt as short sales had piled up in the 6.33%, 2035 bond and the former is also up for sale next week, they said. 

The 2032 bond's yield had risen 6 basis points this week at Thursday's close of 6.45%. While some traders considered the rejection of bids an outright yield signal from the central bank, others conjectured that the government did not want to issue the seven-year security at a higher yield than the 10-year bond. The bond's cut-off yield would have been near 6.52% if accepted, higher than the prevailing secondary market yield of the on-the-run 10-year 6.48%, 2035 bond, dealers said. The RBI got 143 bids worth INR 265.84 billion for the 2032 bond at the auction.

"The government has used its cash balances to show its strength, the fiscal worries should also go down now," a dealer at a private-sector bank said. "The fact that he (the RBI) chose to cancel the entire auction is because he wanted to send a strong signal to the market, rather than accepting a small amount that may have been at an acceptable rate."

Some traders said the 10-year bond yield may not rise above 6.60% in the coming weeks as state-owned banks may step up purchases around the psychologically crucial level, now seen as the top of the trading range. The yield on the 6.33%, 2035 bond ended above the 6.50-6.55% range for the first time this month Thursday after US Treasury yields shot up and traders trimmed bets on a December rate cut in India following the comments by US Federal Reserve Chair Jerome Powell. A slight overnight rise in the 10-year US Treasury yield to 4.12% intraday from 4.09% at 1700 IST Thursday had weighed on gilt prices earlier in the day, dealers said.

The firm demand for long-term bonds at the auction also aided gilt prices and most gilts maturing in 30-50 years ended higher while the 7.24%, 2055 gilt offered at the auction was off lows. Demand from life insurers helped the auction sail through, especially as the supply of bonds maturing in about 30 years was only INR 120 billion. Some dealers speculated that the government or the central bank nudged insurers to pick up the 2054 green bond at a green premium, or "greenium".

The Life Insurance Corp. of India may also have swept the auction, leading to the 6.98%, 2054 green bond's cut-off price being set at INR 98.47 at the auction against INR 97.19 estimated in an Informist poll, dealers said. The RBI accepted only six bids for the INR 50 billion of the green bond on offer. As demand was diverted to the green bond, the 30-year benchmark gilt's cut-off price was slightly lower than expected. Banks likely picked up the 5.91%, 2028 gilt for their asset-liability management as the bond is seen to offer a lucrative "carry", or return, over the cost of funding near the repo rate of 5.50%.

Hopes of follow-up action to cap yields were reignited as a one-time reduction in supply is unlikely to be enough for yields to be sustained at current levels, dealers said. Some traders expect the action any time as durable liquidity has shrunk because of the central bank's dollar sales to protect the rupee. The RBI was consistently selling dollars in the spot market Friday as well to avert the rupee hitting its record low of 88.8025 against the dollar. The domestic unit ended at 88.7650 a dollar as banks bought the greenback on behalf of importers, with the rise in the dollar index in European trade also weighing on the rupee.

Currently, the daily banking system liquidity continues to tread in a neutral zone rather than the 1% surplus that RBI Governor Sanjay Malhotra had said he would aim to maintain. However, most traders said the RBI would hold off until the December meeting of the Monetary Policy Committee to announce any OMO purchases as the last tranche of its cash reserve ratio cut takes effect the fortnight of the meeting. The most pessimistic view is that the RBI will only begin buying bonds in Jan-Mar, amid a seasonal increase in currency in circulation and durable liquidity leakage, dealers said.

"If the RBI has to actively manage both the bond market and the forex (foreign exchange) market to prevent the markets from falling, then don't you think there is something inherently wrong in the system right now?" a dealer at a primary dealership said.

Turnover in the gilts market was INR 489.30 billion, up from INR 426.40 billion Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. Trade only picked up late in the day after the auction result. Trade volumes have increased steadily through the week to routine levels as traders returned from Diwali leave and there were abundant cues in the market, dealers said. There were two trades worth INR 100 million using the RBI's wholesale e-rupee pilot Friday after six straight days of no trade using the mode.

OUTLOOK

Gilts are not traded Saturday. Monday, government bond prices may rise after the state bond auction notified for next week was smaller than indicated and after the RBI rejected all bids for INR 110 billion of the 6.28%, 2032 bond Friday. States plan to raise INR 136 billion via bonds Tuesday, against INR 194.50 billion in the Dec indicative calendar for the quarter ending December.

Traders continue to be uncertain whether the RBI's rate-setting panel will cut the repo rate in December. At the same time, confidence of demand matching supply and the government's fiscal strength has increased after the reduction in bond supply at Friday's auction, dealers said. Traders continue to expect the RBI to soon conduct open market operations to buy gilts, though estimates of the timing of such action vary.

Dealers are also track developments on the talks between India and the US for a trade deal. Progress in the talks may weigh on gilt prices, but any reports of a delay in the final announcement of the deal may aid bonds, dealers said. US President Donald Trump Wednesday said he was ready for a trade deal with India.

Movement in US Treasury yields, crude oil prices, and the rupee may also influence gilts. The yield on the 10-year benchmark 6.33%, 2035 bond is seen at 6.48-6.59%. Meanwhile, the 6.48%, 2035 bond is seen moving in a range of 6.42-6.49% Monday.

India Gilts: Remain down; 2054 green bond auction demand seen firm

MUMBAI--1233 IST--Prices of government bonds remained down in thin trade as traders awaited the result of the weekly gilt auction. Demand at the auction is seen mixed, especially since two of the four bonds for sale by the government are long-term gilts. The government offered to sell INR 90 billion of the 5.91%, 2028 bond, INR 110 billion of 6.28%, 2032 bond, INR 70 billion of the 7.24%, 2055 bond and INR 50 billion of the 6.98%, 2054 green bond Friday.

In an unexpected turn, the 6.98%, 2054 green bond auction is seen sailing through due to demand from insurance companies for the paper, dealers said. Earlier in the day, traders doubted whether there would be any demand for this bond, due to its tenure, and the additional 'greenium' investors have to pay. The government typically demands a 'greenium', or green premium, for bonds which are used for funding environmentally friendly projects. This is the first green bond auction in Oct-Mar. At the last auction of the 6.98%, 2054 green bond in June, the RBI did not accept any bids for the bond at auction.

"We have heard there is good demand for this green bond from insurers, around (INR 30 billion) 3,000 crores they will take, so that's 3,000 of 5,000 (INR 50 billion notified), almost the full thing," a dealer at a private sector bank said. 

The other long-term bond, the 7.24%, 2055 gilt, may not see such strong demand, but some traders said a state-owned insurance company was purchasing around INR 10 billion to INR 20 billion of the bond for forward-rate agreements.    

Demand for the three-year paper is seen firm and the INR-90-billion stock of the bond is expected to be purchased by only one or two bidders, dealers said. Private sector banks' asset and liability managers are likely to pick up the bond. Demand for the seven-year paper is seen mixed, with some traders preferring its higher yield while others said the duration of the paper did not match any of their requirements. The 2032 paper was last valued at a yield of 6.44%, according to indicative prices published by Financial Benchmarks India Pvt. Ltd. Thursday. This is 14 basis points below the 6.58% yield of the 10-year benchmark paper, and 6 bps below the 6.48%, 2035 bond. Seven-year gilt yields are yet to realign along with the rest of the yield curve, dealers said. State-owned banks' asset and liability managers are likely to pick up the seven-year bond, dealers said.   

Trade volume in the secondary market was thin. Bond prices may track the result of the auction, though a dealer said that since all the gilts for sale were investor papers and hence the cut-offs may not matter to traders. At 1240 IST, the turnover in the gilt market was INR 81.25 billion, less than half of INR 168.60 billion at the 1230 IST Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 6.33%, 2035 benchmark bond is seen moving in a range of 6.55-6.62% during the day, while that on the 6.48%, 2035 bond is seen at 6.47-6.52%.  (Cassandra Carvalho)

India Gilts: Down in thin trade before fresh supply at INR-320-bln auction

MUMBAI--1018 IST--Government bond prices were down Friday in thin trade ahead of INR 320 billion of fresh supply, amid lack of positive cues that could trigger buying interest, dealers said. Traders exited their positions with the view that the 10-year benchmark 6.33%, 2035 gilt yield could rise to 6.60% in the near term, after it rose above the key 6.55% level Thursday, dealers said. At 1018 IST, the turnover in the gilt market was INR 53.30 billion, lower than INR 92.65 billion at the 1030 IST Thursday, according to data on the RBI's Negotiated Dealing System-Order Matching platform.   

Traders made room for fresh stock of gilts before the auction. The government will sell INR 90 billion of the 5.91%, 2028 bond, INR 110 billion of the 6.28%, 2032 bond, INR 70 billion of the 7.24%, 2055 bond and INR 50 billion of the 6.98%, 2054 green bond. Demand at the auction is seen moderate, though demand for the two long-term bonds is what traders will track closely. Some traders expect long-term investors such as life insurers and pension funds to buy the 2055 bond and the 2054 green bond after the yields on these bonds rose Thursday, dealers said. The Reserve Bank of India set a cut-off of 1.50 paise on the green bond and 0.67 paisa on the 2055 gilt at the underwriting auction. 
 

Later in the day, traders may trim portfolios nearing the end of trade to reduce risk ahead of the weekend. The 10-year benchmark gilt and the newly-issued 6.48%, 2035 gilt may see selling pressure as traders focus on next week's auction, where the government will sell INR 320 billion of a 10-year gilt.

"We have a 10-year (bond) auction next week. The view is that before the auction (next week), we will hit 6.60% (yield on the 10-year benchmark gilt), so people are selling off before it hits that level," a dealer at a state-owned bank said. "No one is interested to buy, there is no positivity for us to buy." 

The yield on the 6.33%, 2035 benchmark bond is seen moving in a range of 6.55-6.62% during the day, while that on the 6.48%, 2035 bond is seen at 6.47-6.52%.  (Janwee Prajapati)

India Gilts: Seen down on rise in US yields ahead of fresh supply

MUMBAI – Prices of government bonds are seen opening lower Friday, tracking an overnight rise in US Treasury yields ahead of the weekly gilt auction of INR 320 billion, which includes two long-term bonds, dealers said.  

The yield on the 10-year benchmark 6.33%, 2035 gilt is seen moving in a range of 6.55-6.60% during the day. On Thursday, the 2035 gilt ended at INR 98.30, or 6.57% yield. The 10-year 6.48%, 2035 bond is expected to move in a range of 6.47-6.52%. On Thursday, it ended at INR 99.92 or 6.49% yield. The yield on the benchmark 10-year US Treasury note was 4.10% at 0800 IST, inching up from 4.09% at 1700 IST Thursday. 

The 10-year US yield rose to a high of 4.12% overnight, as traders continued to trim bets of a rate cut by the US Federal Open Market Committee in December after US Federal Reserve Chair Jerome Powell said a rate cut at the FOMC's next policy meeting was "far from" a foregone conclusion. Fed fund futures are now pricing in a 73% chance of a 25 bps cut in December, down from 91% chances a week ago. Domestically, private sector banks net sold gilts worth INR 50.55 billion Thursday as Powell's commentary dampened bets of a rate cut by the Reserve Bank of India's Monetary Policy Committee in December. 

On Friday, the government will sell INR 90 billion of the 5.91%, 2028 bond, INR 110 billion of 6.28%, 2032 bond, INR 70 billion of the 7.24%, 2055 bond and INR 50 billion of the 6.98%, 2054 green bond. Demand for bonds is expected to be modest, with banks looking to cut down on additional statutory liquidity ratio securities amid tight liquidity and firm credit demand. Long-term investors such as life insurers are expected to mop up supply of the 30-year bonds after the sharp rise in their yields Thursday, dealers said. Traders are unlikely to show interest in either of the long-term bonds, as uncertainty on the rate cut trajectory and supply issues persist. The result of the auction will lend direction to bond prices later in the day, dealers said. 

As is usually seen on Fridays, traders may trim portfolios nearing the end of trade to reduce risk ahead of the weekend. Friday's closing yield level, or weekly close on the 10-year benchmark yield will be crucial for indication of price movement next week. After the 10-year benchmark 6.33%, 2035 gilt rose above the key 6.55% level Thursday, traders expect the yield to rise to 6.60% on the upside. Bond prices may also take cues from the movement of the rupee against the dollar.  (Cassandra Carvalho)

End

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

Edited by Rajeev Pai

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