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Informist, Monday, Dec. 22, 2025

By Janwee Prajapati
 

MUMBAI – Government bond prices ended sharply down Monday as traders' expectations that the Reserve Bank of India would announce a third open market operation did not materialise, dealers said. A significantly higher-than-indicated quantum of state bond supply weighed on prices, as traders now expect a heavier supply of such papers. 

The Monetary Policy Committee minutes released post-market hours Friday did not provide any cues on any further rate cuts, which soured market sentiment that yields would soften. A sharp rise in the overnight indexed swap rate, US Treasury yields, and the rupee's depreciation also weighed on sentiment. Trading volume remained thin as several traders were on leave for Christmas and the New Year, dealers said.

The 10-year benchmark 6.48%, 2035 gilt closed at INR 98.65, down from INR 99.12 Friday. The closing yield was 6.6678%, up from 6.6017% Friday. The yield on the 6.48%, 2035 bond hit 6.68% intraday, its highest since Mar. 18. The five-year OIS rate also rose to 5.99%, its highest since March, whereas one-year OIS ended at 5.51%, its highest since Sept. 4. 

"It (bond price) did not fall on Friday, the market was holding because people were expecting an OMO announcement post-market hours," a dealer at a private sector bank said. "... but even after (INR) 1 trillion OMO, demand was not good at (the weekly gilt) auction. It (price) did not react on Friday because they were hoping for more OMOs (post-market Friday). But once it (OMO auction announcement) did not happen, the market reacted today." 

Mutual funds and private-sector banks likely sold gilts, while public-sector banks likely bought them, which limited the price decline, dealers said. Friday, mutual funds net sold gilts worth INR 29.79 billion, while public sector banks net bought gilts worth INR 9.08 billion.

Traders across banks and mutual funds had low risk appetite at the end of the year, when trading volumes are typically low due to a fall in proprietary trading by foreign banks. Adding to the pain, foreign portfolio investors sold nearly INR 16.31 billion of fully accessible route gilts Monday, data from the Clearing Corp. of India at 1700 IST showed.

At the state bond auction on Tuesday, long-term bonds are likely to outperform shorter-term bonds, as traders expect strong demand from long-term investors such as life insurers and pension funds. However, the overall demand for state bonds is likely to be muted as traders lack risk appetite, dealers said. Banks are likely to bid for state bonds with maturities of up to 15 years for their held-to-maturity portfolios, but they will likely refrain from bidding aggressively. The significantly higher supply of these bonds will pull up yields at the auction. This rise in state bond yields will percolate into gilts, resulting in gilt prices falling, dealers said. Traders expect the spread between the cut-off yield on state bonds and gilts of similar maturity to widen further by 5-10 basis points. The cut-off yields on states' 10-year bonds at last week's auction ranged from 7.23% to 7.56%.  

After selling INR 1 trillion of gilts to the RBI through OMO auctions earlier this month, traders now expect the RBI to purchase another INR 1.5 trillion INR to INR 2 trillion of gilts through OMO auctions in up to 3-4 tranches, dealers said. 

"Now it depends on the RBI when they will intervene. They are intervening in the rupee, which means they have space," a dealer at a private sector bank said. "If RBI buys bonds through on-screen or OMO, then the yields might soften a bit, but if it doesn't, then the market will take the cue that it (RBI) is okay with current yields, and it (bond yield) might go up further."

Some traders said short-term bonds offered more value than gilts maturing in 10 years and above, while others said that the higher supply in the below 10-year segment of both gilts and state bonds will ensure that secondary market bond prices remain under pressure. The five-year benchmark 6.01%, 2030 gilt offers a spread of more than 115 bps over the policy repo rate of 5.25%, making it attractive as an interest-accruing bond in banks' available-for-sale books, dealers said. Traders may also be keen on the bond, as it may rise if the RBI announces another open market operations auction to buy bonds. 

Traders also placed short bets on the 6.48%, 2035 bond as they expect yields to rise further. The yield on the benchmark 6.48%, 2035 gilt may rise to 6.70% this week, and up to 6.80% in February, 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 at 1330 IST showed trades worth INR 64.98 billion in the 6.48%, 2035 gilt, up from INR 62.25 billion Friday. 

Rising currency forward and overnight indexed swap rates make it more lucrative to use rupee liquidity to receive the derivative rate rather than investing in the bond market. The rupee fell to INR 89.56 per dollar, although it is above the record low of 91.08 per dollar, which it hit last week. The one-year forward premium rose to 3.05% Monday, its highest since October 2022. The five-year OIS rate also rose to 5.99%, its highest since March. 

Turnover in the gilts market was INR 263.65 billion Monday, lower than INR 357.50 billion Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. There were no trades using the RBI's wholesale e-rupee pilot Monday, the same as Friday.

OUTLOOK

On Tuesday, gilts are expected to track overnight movements in US Treasury yields. The movement of OIS and the rupee early in the trade may also lend cues, dealers said.

Traders may refrain from taking large bets early ahead of the INR-332.20-billion auction of state bonds. Demand at the auction is likely to be muted as the quantum is way higher than the INR 268.55 billion indicated in the Oct-Dec borrowing calendar.

Traders will monitor developments on the India-US trade deal and will keep an eye on crude oil prices. Some traders are also hopeful that the likely inclusion of Indian government bonds in Bloomberg's Global Aggregate Index in January will pull up bond prices, dealers said.

The 10-year benchmark 6.48%, 2035 bond is seen in a range of 6.60-6.70%.

India Gilts: Down more; 1-yr dlr/rupee fwd premium rise triggers stop-losses

NEW DELHI--1620 IST--Government bond prices fell further after the one-year dollar-rupee forward premium shot up to an over three-year high on excess dollar liquidity, dealers said. This pushed the yield on the 10-year 6.48%, 2035 gilt past the crucial 6.65% level, triggering stop-losses and pushing the 10-year benchmark yield to 6.68%, its highest since Mar. 18.

"The one-year swap rate in the currency market is shooting up, (it) will put pressure on bonds," a dealer at a primary dealership said. "Stop-losses are bound to trigger." Traders hit stop-losses on the 6.48%, 2035 bond at around INR 98.78, dealers said.

Rising currency forward rates and overnight indexed swap rates make it more lucrative to use rupee liquidity to receive the derivative rate rather than investing in the bond market. The one-year forward premium rose as much as 20 basis points to 3.06% Monday, its highest since October 2022. The five-year OIS rate also rose to as much as 5.99%, its highest since March.

With the 10-year gilt yield now at its highest in 2025-26 (Apr-Mar), despite a 100-basis-point reduction in the repo rate, traders were uncertain about the direction of bond prices. Some traders placed fresh short bets expecting a breakout in the 10-year yield to 6.80%, dealers said. The next technical resistance levels for the benchmark yield were at 6.72% and 6.96%, dealers said.

Some traders said short-term bonds offered more value than gilts maturing in 10 years and above, while others said that the supply in the sub-10-year segment of both gilts and state bonds will ensure that secondary market bond prices remain under pressure.  The five-year benchmark 6.01%, 2030 gilt offers a spread of more than 115 bps over the policy repo rate of 5.25%, making it attractive as an interest-accruing bond in banks' available-for-sale books, dealers said. Traders may also be keen on the bond as it may rise if the RBI announces another open market operation to buy bonds.

"The only thing that can save the market is the RBI coming out with weekly OMOs to create space for banks to buy, otherwise traders will have to dump their portfolios and reduce duration," a dealer at a state-owned bank said. "I think the 6.01%, 2030 (gilt) at 6.42% is a roaring buy, and this yield level won't last long. It will fall from here."

At 1620 IST, the turnover in the gilt market was INR 227.85 billion, lower than INR 320.95 billion at 1630 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. Trade volumes were even more lacklustre before the stop-losses and the fresh purchases that followed the sharp price decline. The yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.64-6.70% for the rest of the day. (Aaryan Khanna)

India Gilts: Remain sharply dn; traders expect 10-year yld to top FY26 high

MUMBAI--1404 IST--Government bond prices remained sharply down as traders placed short bets and investors held off on buys on the view that the 10-year benchmark gilt yield would top its 2025-26 (Apr-Mar) high of 6.66% this week, dealers said. A lack of appetite in the face of heavy state bond supply, a rise in US Treasury yields, and a fall in the rupee weighed on gilt prices.

The yield on the benchmark 6.48%, 2035 gilt may rise to 6.70% this week and up to 6.80% in February, dealers said. A rise above 6.66% yield, the high hit on Aug. 26, may lead to stop-losses being hit for traders. The five-year benchmark yield also hit 6.41%, its highest in the current financial year, while the 15-year benchmark yield topped 7.06% Monday for the first time since June 2024.

"I expect the (10-year) yield to go up to 6.80% in February," a dealer at a primary dealership said. "People are placing short bets because of the expectation of this fall so that they can cover it later at some 10-basis-point difference." 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 1330 IST showed trades worth INR 64.98 billion in the 6.48%, 2035 gilt, up from INR 62.25 billion Friday.  

State-owned banks were not aggressively adding gilts to their held-to-maturity books as yields were lower than the weighted average yield on their portfolios, dealers said. Moreover, with investing rules now preventing the shifting of bonds between portfolios at the financial year-end, banks were being more selective with their purchases. Traders across banks and mutual funds also had low risk appetite at the end of the year, when trading volumes are dull due to the absence of proprietary trading from foreign banks. Adding to the pain, foreign portfolio investors sold nearly INR 19 billion of fully accessible route gilts Monday, data from the Clearing Corp. of India as of 1330 IST showed.

Traders were also disappointed with the Reserve Bank of India not announcing a third open market operation auction to buy gilts in December, as some had expected on Friday. Fifteen states will raise INR 332.20 billion, higher than the indicated quantum of INR 268.55 billion in the borrowing calendar for Oct-Dec. US yields were up from Friday while the rupee also depreciated 0.3% to INR 89.56 a dollar, even as the domestic unit was off its record low hit last week.

After selling gilts to the RBI through INR-1-trillion of OMO auctions earlier this month, banks are aiming to replenish some of that stock at the state bond auction Tuesday. State-owned banks, in particularl, preferred picking up state bonds for their held-to-maturity portfolios rather than buy gilts at levels that were lucrative when compared with the current repo rate but were historically middling. As for trading portfolios, risk appetite was poor with no expected positives seen till the end of the month that could prevent a continued slide in bond prices, dealers said.

"If my view is that in six months the yields will be higher from here I will only replenish gradually, instead preferring state bonds or corporate bonds," a dealer at a state-owned bank said. "On the technical charts, if the (10-year) yield breaks this 6.65-6.66% level, the next resistance is 6.96%."

At 1404 IST, the turnover in the gilt market was INR 123.20 billion, lower than INR 236.65 billion at 1430 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.57-6.68% for the rest of the day. (Janwee Prajapati and Aaryan Khanna)

India Gilts: Sharply down on large state bond supply, lack of OMO notice

NEW DELHI--0955 IST--Government bond prices fell sharply due to a larger-than-indicated state bond auction and lack of an announcement by the Reserve Bank of India to buy gilts through open market operations, as some traders had expected. A rise in US Treasury yields over the weekend also weighed on gilt prices amid thin trade, with traders avoiding aggressive bets near the year-end.

Traders had hoped the central bank would announce another OMO auction to buy gilts post market hours Friday after two auctions totalling INR 1 trillion this month announced after the last Monetary Policy Committee meeting on Dec. 5. According to latest data, banking system liquidity remained in a deficit Friday, which the RBI has been managing through constant variable rate repo operations.

Prices had sunk Friday on poor demand for the five-year benchmark 6.01%, 2030 bond at auction and the supply-demand mismatch was likely to widen further at the INR-332.20-billion state bond auction Tuesday, dealers said. The indicative calendar for state issuance for Oct-Dec had pegged supply at INR 268.55 billion this week. Meanwhile, the 10-year US yield rose to 4.17% from 4.14% at 1700 IST Friday.

"After the five-year (bond) auction on Friday it looks like even short-term bonds cannot be protected at these yield levels," a dealer at a private sector bank said. The bid-cover ratio for the 6.01%, 2030 bond at auction Friday was a historic low of 1.74 times, the dealer said. "Between that, higher state bond supply, US yields going up and lack of an OMO, the offers are piling up."

Purchases by state-owned banks remained scant despite the 10-year benchmark yield nearing 6.64%, its highest level since late August. Dealers said they were not keen to buy bonds in the secondary market amid lack of trade volumes, poor investor appetite for gilts maturing in up to 15 years, and as the MPC was unlikely to cut rates in February. Minutes of the rate-setting panel's December meeting were as the market expected and did not suggest the MPC was keen to cut rates immediately, dealers said. 

"The market has no depth on either side, so it easy to pull prices 20 paise both ways," a dealer at another private sector bank said. "PSUs (state-owned banks) are also not putting bids in, which is adding to the slide."

At 0955 IST, the turnover in the gilt market was INR 17.60 billion, lower than INR 22.00 billion at 0930 IST Friday, according to data on the RBI's Negotiated Dealing System-Order Matching platform. The yield on the 10-year benchmark 6.48%, 2035 bond is seen at 6.57-6.66% Monday. (Aaryan Khanna)

India Gilts: Seen dn on large state bond supply, poor risk appetite at yr-end

NEW DELHI – Government bond prices are seen opening lower as traders continue to have poor risk appetite amid consistent supply pressure and reduced trader activity at the year-end. Minutes of the Reserve Bank of India's December Monetary Policy Committee meeting, released after market hours Friday, were broadly as traders had expected, dealers said.

The 10-year benchmark 6.48%, 2035 bond is seen in the range of 6.57-6.64% yield after ending at INR 99.12, or 6.60% yield Friday. Traders have discontinued tracking the erstwhile 10-year benchmark 6.33%, 2035 bond due to its low trade volumes, though it may be in vogue if the central bank includes the bond in any purchases in the future, dealers said.

Traders said the poor demand for the five-year benchmark 6.01%, 2030 gilt at auction Friday suggested that demand still remained weaker than supply and bond prices would not sustain an upward momentum, especially with heavy state bond issuance coming up. States will raise INR 332.20 billion on Tuesday against INR 268.55 billion indicated for this week in the calendar for Oct-Dec. Moreover, some traders had expected the RBI to announce an open market operation to buy gilts after market hours Friday after two such auctions in the last two weeks worth INR 1 trillion. Traders who had bet on an OMO announcement or 'dovish' comments in the MPC minutes would sell gilts Monday, though they were in a minority Friday, dealers said. 

Traders said the minutes suggested there was enough room to cut rates if growth momentum sinks but didn't show a preference for an immediate rate cut after 125 basis points of repo rate reductions in 2025. The MPC cut the repo rate by 25 bps to 5.25% earlier this month while retaining its policy stance at neutral. External MPC member Ram Singh continued to bat for an accommodative stance due to dormant price momentum and to support growth, which was an outlier view on the panel. Following the minutes, the market does not expect a repo rate cut in February, dealers said. 

"Real policy rates based on our forecasts for headline and underlying inflation is thus estimated to be in vicinity of 1% currently and that is firmly towards lower end of RBI's preferred range of 1.1-1.9%; Nominal policy settings shouldn't be ignored either and that is quite accommodative given historical averages," ICICI Securities Primary Dealership said in a note. "All said, we consider Feb to be a lame duck meeting as RBI MPC waits for a cleaner read of underlying growth-inflation dynamics."

Dealers expect offshore activity to weigh on bond prices Monday despite the pullback in the rupee to 89.27 a dollar Friday, logging its best day in three years, after hitting a record low of 91.08 a dollar last week. Offshore traders are likely to continue paying fixed rates Monday in the five-year overnight indexed swap rate as US Treasury yields remain high, dealers said. The yield on the 10-year US Treasury note rose to 4.17% at 0810 IST from 4.14% at the end of Indian market hours Friday. 

Private sector banks were the top net buyers in the secondary market on Friday and may reverse that trend Monday, dealers said. However, state-owned banks may step up their purchases if the 10-year benchmark yield rises past 6.62%, considered lucrative and approaching the high of 6.66% hit in 2025-26 (Apr-Mar). Trade volumes may be muted after an initial wave of trade as foreign banks avoid large bets before the closing of their accounts at year-end. (Aaryan Khanna)

End

US$1 = INR 89.65

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

Edited by Saji George Titus

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