Informist, Wednesday, Mar 9, 2022

By Aaryan Khanna

NEW DELHI – Government bonds ended sharply higher as traders stepped up purchases and covered short bets at levels considered lucrative, with no further gilt supply expected in the current financial year to weigh on the market, dealers said.

The 10-year benchmark 6.54%, 2032 bond settled at 97.83 rupees or 6.84% yield, against 97.48 rupees or 6.89% on Tuesday

The Centre's last scheduled gilt auction on Feb 25 brought an end to its Oct-Mar borrowing calendar, and it raised only 335.25 bln rupees through gilts against the notified amount of 950 bln rupees in February, dealers said.

Investors added gilts to their portfolios particularly as the 10-year benchmark yield approached the psychologically crucial 6.90% mark earlier today, over which traders avoided placing short bets on fears of intervention by the Reserve Bank of India to cap yields, according to dealers.

Moreover, traders stocked up on gilts towards the end of trade as Brent crude oil prices slipped on reports that Russia favoured a diplomatic solution to its goals in Ukraine, after it invaded its neighbour late last month.

Al Jazeera reported, quoting a Russian foreign ministry spokesperson, that it was better if the country's goals in invading Ukraine were achieved through talks. Moreover, the spokesperson said  Russia's aims did not include overthrowing the government in Kyiv.

Global crude oil prices have risen sharply over the past two weeks on fears that demand would outstrip supply should any disruptions occur from the oil-producing countries. After topping the $130-per-bbl mark earlier today, the Brent crude oil futures for May fell to $125.22-per-bbl by the end of Indian market hours.

Typically, a fall in crude oil prices reduces risks of imported inflation in India and provides more room for the Reserve Bank of India to prolong its monetary policy accommodation.

"The logical ending of the Russia-Ukraine conflict is crude prices coming down, we read these comments and immediately felt that we will see a downturn (in crude prices), but it is important for the talks to have an outcome rather than just a single comment," said a dealer at a private bank.

Concerns, that the recent surge in prices of commodities will lead to higher domestic inflation and a quicker-than-expected withdrawal of policy accommodation, also eased, said dealers.

On Tuesday, Monetary Policy Committee member Ashima Goyal said the central bank had plenty of instruments to handle external shocks without tightening the domestic policy. Moreover, buoyant tax revenues may be used to offset the pain of increased crude oil prices, she said.

The economist's comments were seen as indicating that India's central bank and the rate-setting panel were unlikely to sharply raise rates based on global headwinds, even as Brent crude oil futures remained elevated today, said dealers.

"Goyal is the first MPC member who has spoken after the war has begun, so these are the latest views, and she is indicating a heavily dovish tone, it doesn't look like we'll have any major changes in policy even now," said a dealer at a state-owned bank.

Meanwhile, news channel ETNow said today quoting agencies that the central government may ask oil retailers to hold prices for a while. The move may delay the impact on higher crude oil prices on domestic Consumer Price Index-based inflation, dealers said.

According to data on the Reserve Bank of India's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 230.75 bln rupees, as against 124.80 bln rupees on Tuesday.

OUTLOOK

On Thursday, government bonds are seen opening steady as traders may avoid large bets due to lack of significant domestic cues.

Traders will also look at new developments in the ongoing invasion of Ukraine by Russia for triggers, especially after comments by a Russian spokesperson that indicated that Moscow would prefer a diplomatic end to the war.

Any sharp movement in US Treasury yields and crude oil prices might lend cues when the market opens.

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.81-6.87%.

India Gilts: Up; traders cover short bets as 10-yr yield tops 6.90% 

NEW DELHI--1135 IST--Government bonds rose as traders covered their short bets after yield on the 10-year benchmark 6.54%, 2032 bond topped the psychologically-crucial 6.90% level, dealers said.

Traders weren't keen on trimming holdings on the view that the Reserve Bank of India may intervene to curb the rise in yields beyond 6.90% level.

Yield shave risen 7 basis points since Monday because of a rise in commodity prices, due to Russia's invasion of Ukraine.

Market sentiment got a boost after Informist exclusively reported, quoting a senior finance ministry official, that the Centre is considering various options to manage the impact of the current surge in crude oil prices, but it will not be possible to fully insulate domestic fuel prices.

The government is mulling options including further cut in excise duty, the official said.

Moreover, RBI Monetary Policy Committee Member Ashima Goyal said on Tuesday that the central bank has plenty of instruments to handle external shocks without tightening the domestic policy.

Following Goyal's comments, the market was of the view that the rate-setting panel member may vote against raising interest rates in the next policy meeting, dealers said.

With crude oil prices rising over 42% since the last policy meeting outcome on Feb 10 because of the supply disruptions, the market believes the central bank could raise interest rates sooner than expected. 

"I think the rise is because of the statements about fuel and by Ashima Goyal. Goyal is the first MPC member to speak in public after the rise in yields so market may be looking at that," a dealer at a private bank said.

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.85-6.92%.  (Shubham Rana)

India Gilts: May open steady; rise in crude oil prices to weigh

NEW DELHI – Government bonds may open steady as traders my refrain from placing large bets amid a lack of firm cues. However, the rise in crude oil prices may weigh on market sentiment, dealers said.

Brent crude oil futures for May delivery rose up to $131.64 per barrel in Asian trade today after the US banned Russian oil imports and the UK said it will phase them out by year-end. The decisions are expected to further disrupt the global energy market as Russia is one of the largest crude oil exporters.

Russian oil and oil products make up a small proportion of the US imports, about 8% or 672,000 barrels per day, according to the Energy Information Administration's data. However, US President Joe Biden said that European countries are heavily dependent on Russian energy and may not take such drastic steps.

Dealers are of the view that the Reserve Bank of India will revise its inflation estimates at the next policy meeting in April because of the rising commodity prices. 

A rise in imported inflation starting March may prompt the RBI's Monetary Policy Committee to hike the repo rate by 25 basis points as early as June, against the earlier expectation of a hike in the Oct-Dec quarter, dealers said.

Appetite for dated securities is expected to remain weak, even in the absence of fresh supply, on view that the interest rates will be hiked earlier than expected. 

Traders may also stay on the sidelines, keeping volumes relatively low, dealers said.

Today, yield on the 10-year benchmark 6.54%, 2032 bond is seen at 6.86-6.94%. (Shubham Rana)

End

US$1 = 76.56 rupees

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

Edited by Deepshikha Bhardwaj

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