Informist, Wednesday, Feb 7, 2024
By Nishat Anjum
MUMBAI – Government bond traders seem to have thrown caution to the wind ahead of the outcome of the Monetary Policy Committee meeting on Thursday. This is evident from the average daily trade volume this week–the highest since the financial year began in April, compared with the volume in the weeks of the policy outcomes earlier in the year.
This financial year, all the monetary policy outcomes have been declared on either Thursday or Friday. Excluding the day of the policy, the daily gilt market volume on the Reserve Bank of India’s Negotiated Dealing System-Order Matching system averaged 326 bln rupees on the lower side and 368 bln rupees on the higher side in the weeks of the five policy reviews between April and December. In comparison, trade volumes have averaged a whopping 461.12 bln rupees this week.
Typically, traders avoid aggressive bets before the outcome and take cues from the policy. This week, however, the market has got a boost from a lot of positives going forward, both on the demand-supply and rate front, dealers said. Bond prices have been quick to recover from falls and retain their bias to appreciate, which has enhanced the volume in the market as US Treasury yields have surged over the last week.
“A lot of confidence is coming from the FPI (foreign portfolio investors) buying. Even though US yields have risen, it doesn’t seem to have impacted foreign flows,” a dealer at a private bank said. “Domestic people (traders) might be dancing to the tunes of US yields, but foreign ones are not.”
From 1.30 trln rupees at the end of 2023, foreign investment in bonds under the fully accessible route, which are eligible for inclusion in global bond indices, has risen to 1.57 trln rupees as of today. Even when US Treasury yields have surged, FPIs have been on the buying side as they expand their portfolios before June, dealers said.
JP Morgan will add Indian gilts to its Global Bond Index – Emerging Markets starting Jun 28, while Bloomberg has proposed to add bonds under the fully-accessible route to its emerging market indices starting September. Traders expect up to $30 bln of inflows from foreign portfolio investors in 2024-25 (Apr-Mar).
The surge in trade volume is despite bond yields not seeing much rise in volatility, either in trading ranges or in standard deviation. Volatility in the 10-year benchmark bond, as calculated by standard deviation, has risen in the run-up to the policy review this week than the last two MPC outcomes. However, it remains lower than 0.01, the mark hit ahead of the April and August MPC outcomes.
FPI demand is the cherry on the cake as demand-supply dynamics in the gilt market already look favourable, dealers said. The supply of government securities for the current fiscal year ends on Feb 16, and the gross borrowing for 2024-25, at 14.13 trln rupees, is pegged more than 1 trln rupees lower than market expectations.
Even though the market widely expects the RBI’s rate-setting panel to maintain the repo rate steady at 6.50%, bond traders are carrying heavier than usual portfolios into the rate decision. Some traders are betting on a change in policy stance to ‘neutral’ from the current ‘withdrawal of accommodation’, dealers said.
The six variable rate reverse repo auctions conducted by the RBI since Friday have done little to dampen the hope of liquidity conditions easing going forward. The liquidity deficit, which rose to a record 3.46 trln rupees in January, has since fallen to 1.01 trln rupees as at end of trade Tuesday. Overnight money market rates have shrunk to or below the repo rate of 6.50%, rather than hovering near 6.75%.
“If they (RBI) want to play from both sides, it’s better to change the stance to neutral,” a dealer at a primary dealership said. “From the policy, the market is not betting on anything negative. This time, neutral would be positive.” End
Edited by Ashish Shirke
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