India Gilts Review:10-yr yld at 6-mo low; RBI turns on liquidity tap

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India Gilts Review:10-yr yld at 6-mo low; RBI turns on liquidity tap

Friday, Feb 14

 

By Bhaskar Dutta

 

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NEW DELHI – Yield on the 10-year benchmark government bond closed at its lowest level in more than six months today as recent steps taken by the Reserve of India to inject funds in a banking system which is already swimming in surplus liquidity sent traders rushing to fill up their bond portfolios.

 

Today, the 10-year benchmark 6.45%, 2029 bond closed at 100.55 rupees or 6.3713% yield as against 100.16 rupees or 6.4263% yield on Thursday. Today’s level marks the lowest closing yield for a 10-year benchmark bond since Aug 7.

 

Bonds have had a stellar run since the RBI’s monetary policy statement on Feb 6, with yield on the 10-year benchmark paper shedding 14 basis points. While the RBI could not gift the market a rate cut, given recent surges in inflation, the still provided much reason for cheer with the overhaul of its liquidity management framework.

 

The revised liquidity management framework did not call for keeping liquidity in a ‘close-to-neutral’ deficit that was prescribed earlier. As long as the old framework remained in effect, the huge surplus of liquidity that has existed in the banking system since June would have been an anomaly, and would eventually have to be drained out.

 

The RBI said that with the weighted average call rate being the single operating target of the framework, there was no need to cap liquidity provision through fixed-rate repo and 14-day repo operations at 1% of net demand and time liabilities. Instead, the new framework calls for adequate provision or absorption of liquidity as warranted by market conditions, unrestricted by quantitative ceilings.

 

The central bank said it would now conduct term repos of one-year and three-year tenures for a total of up to 1 trln rupees at the policy repo rate–currently at 5.15%–from the fortnight starting Feb 15.

 

The first long-term repo auction will be held on Monday for a quantum of 250 bln rupees and a tenure of three years. This will be followed by a 250-bln-rupee one-year repo operation on Feb 24.

 

Effectively, the RBI’s move implies that the central bank will not only permit the massive surfeit of liquidity in the banking system–currently estimated at around 3 trln rupees–to remain, it is also amenable to letting it balloon further.

 

For banks, the long-term repos also provide a clear-cut trading opportunity as the funds availed at the long-term repo windows can be parked in short-term government securities which are currently offering much higher yields. For instance the most liquid three-year and four-year bonds would fetch yields that are 63-77 bps higher than the repo rate of 5.15%.

 

The anticipation of this trade has sent market participants scrambling to acquire short-term bonds, with yield on the four-year 7.32%, 2024 bond sliding 31 bps since the monetary policy statement.

 

“This is like demonetisation all over again, the liquidity surplus if you take into account the long-term repos will swell to 4.5 trln rupees; that is comparable to demonetisation,” a dealer with a primary dealership said. “This momentum will continue now, everyone has to be long bonds when the central bank is on your side and giving you a clear trade, the 10-year yield could fall to 6.25% in coming months,” he said.

 

The favourable view on Indian bonds has also spurred foreign portfolio investors to step up purchases, with overseas fund houses pouring a massive 145.35 bln rupees into sovereign debt since the RBI’s policy statement. Today, FPIs’ net outstanding investment in government bonds rose by 9.64 bln rupees, data released by the Clearing Corporation of India showed.

 

Given that the bleak state of economic growth strengthens the case for the central bank to remain accommodative, the party is set to continue for bonds, traders said. The RBI, which has its hands tied up with inflation, is likely to continue using unconventional tools to support growth instead of monetary policy, dealers said.

 

Consequently, even the record-high borrowing programme of the Centre for the next financial year may not pose a challenge for the market. The government is scheduled to sell bonds worth 7.80 trln rupees in 2020-21 (Apr-Mar), 10% higher than the debt sales conducted this year. 

 

“Till such time we have a clear picture on growth recovering, the RBI will not withdraw accommodation,” a dealer with a private bank said. “The bond supply that will start from April; that was looking very daunting before the policy. But we are in a situation where rates will not be hiked even when inflation is rising and the central bank is clearly on the market’s side, so supply will go through,” he said.

 

Marketwide turnover was 853.15 bln rupees today against 691.55 bln rupees on Thursday, according to the RBI’s Negotiated Dealing System – Order Matching platform.

 

Government bonds are not traded on Saturdays.

 

Bonds may gain on Monday as the RBI’s recent assurance of ample liquidity in the banking system has dramatically improved the view on bonds. 

 

Moreover, with the Centre’s borrowing programme for the current financial year having come to a close, the market is spared weekly supply of central government debt till April, when the next financial year will commence.

 

However, some traders may choose to book after the recent surge in bond prices. 

 

Any sharp movement in US Treasury yields or crude oil prices, especially in the backdrop of the new coronavirus, may steer bonds in early trade.

 

Yield on the 10-year benchmark 6.45%, 2029 bond is seen in a band of 6.33-6.40% as against 6.37% at close today.

 

  TODAY THURSDAY
Price Yield Price Yield

7.32%, 2024

 104.8700  5.9170%  104.8400  5.9281%

7.27%, 2026

 105.2550  6.2251%  105.1950  6.2377%
7.26%, 2029  104.7600  6.5451%  104.4500  6.5908%
6.45%, 2029  100.5500  6.3713%  100.1575  6.4263%
7.57%, 2033  108.0800

 6.6454%

 107.3675

 6.7234%

 


India Gilts: Up more on FPI buy; mkt upbeat on RBI’s liquidity steps

 

  1450 IST PRICE HIGH PRICE LOW OPEN PREVIOUS
6.45%, 2029
PRICE (rupees) 100.23 100.25 99.20 99.26 100.16
YTM (%)       6.4169 6.4130 6.5618 6.5533 6.4263

 

NEW DELHI–1450 IST–Government bonds rose further because overseas investors stepped up purchases of relatively higher-yielding Indian sovereign debt on the view that the spread of the coronavirus would further push down US Treasury yields and crude oil prices, dealers said.

 

Yields on the 10-year benchmark US Treasury have nosedived 21 basis points since Jan 14 due to fear over the spread of coronavirus and settled at 1.61% on Thursday. Crude oil prices have also slumped considerably during the same period as the most traded contract on the slumped by 11.26% or $6.54 per barrel.

 

So far in the day, foreign portfolio investors have net bought Indian dated securities of 42.36 bln rupees, data available on the website of Clearing Corp of India showed. Since Jan 14, overseas investors have bought 142.80 bln rupees of government bonds.

 

“FPI’s have been buying heavily since the outbreak of coronavirus which has supported the movement of price in the market and with the sentiment already positive because of RBI’s step, it is likely to remain positive,” a dealer with a private bank said. 

 

Moreover, sentiment in the market remained positive because of the steps taken by the Reserve Bank of India on surplus liquidity and its decision to conduct long-term repo operations kept market sentiment upbeat, dealers said.

 

In its monetary policy statement last week, the RBI kept repo rate unchanged at 5.15% because of a recent rise in headline inflation. However, market sentiment improved after the RBI announced steps on liquidity, which suggested that the central bank would let liquidity remain in surplus for a long stretch of time. 

 

The revised liquidity management framework suggests that liquidity operations will be warranted by “underlying and evolving market conditions” instead of liquidity deficit being kept “close to neutral” as prescribed under usual circumstances.

 

The RBI also announced 1 trln rupees of one-year and three-year long-term repo operations at the current repo rate of 5.15%. This move is seen as being aimed at improving the transmission of 135-basis-point rate cut made by the central bank in 2019.

 

The first long-term repo auction for 250 bln rupees with a tenure of three years will be held on Monday. This will be followed by a 250-bln-rupee one-year repo operation on Feb 24.

 

The benchmark 6.45%, 2029 bond remained a laggard compared with its peers in the 10-14 year segment as market participants expect the paper to lose its benchmark status with its net outstanding reaching close to 1 trln rupees, dealers said.

 

Traders believed supply of the paper will increase due to switch operations, which could take the net outstanding on the paper near the government’s informal borrowing limit of 1.2 trln rupees through a single dated .

 

The current outstanding on the 10-year benchmark bond stands at 958.40 bln rupees, according to data available on the Reserve Bank of India’s website.

 

The Centre has already conducted 1.28 trln rupees of switches this financial year, higher than the budgeted target of 500 bln rupees. The government has revised the target for gilt switches in 2019-20 (Apr-Mar) to 1.65 trln rupees.  (Vaibhav Chakraborty)


India Gilts: Up as mkt remains buoyant on RBI’s stance on liquidity 

 

6.45%, 2029 At 1025 IST PRICE HIGH PRICE LOW OPEN PREVIOUS
Price (Rupees) 100.12 100.25 99.20 99.26 100.16
YTM (%) 6.4313 6.4130 6.5618 6.5533 6.4263

 

NEW DELHI–1025 IST-–Most government bond prices rose as the steps taken by the Reserve Bank of India on surplus liquidity and its decision to conduct long-term repo operations kept market sentiment upbeat, dealers said.

 

In its policy statement last week, the RBI kept repo rate unchanged at 5.15% because of a recent rise in headline inflation. However, market sentiment improved after the RBI announced steps on liquidity, which suggested that the central bank would let liquidity remain in surplus for a long stretch of time. 

 

The revised liquidity management framework suggests that liquidity operations will be warranted by “underlying and evolving market conditions” instead of liquidity deficit being kept “close to neutral” as prescribed under usual circumstances.

 

The RBI also announced 1 trln rupees worth of one-year and three-year long-term repo operations at the current repo rate of 5.15%. This move is seen as being aimed at improving the transmission of 135-basis-point rate cut made by the central bank in 2019.

 

The first long-term repo auction for 250 bln rupees with a tenure of three years will be held on Monday. This will be followed by a 250-bln-rupee one-year repo operation on Feb 24.

 

Moreover, overseas investors stepping up purchases of domestic dated securities also supported the rise in bond prices after the 2020-21 (Apr-Mar) Union Budget, dealers said. Foreign portfolio investors have net bought 127.05 bln rupees worth of government securities after Jan 31, data available on the website of Clearing Corp of India showed.  

 

“The market is up largely because of the LTRO (long-term repo operations) and RBI’s stance on surplus liquidity, moreover, FPI’s have been buying good amount of bonds due to the spread of coronavirus, so that has also supported the upward movement in the market,” said a dealer with a mutual fund house.

 

“The 10-year saw a fat finger trade in the morning, which will most likely be reversed by the Reserve Bank of India; but the paper seems to be under pressure because of its current outstanding and impending switch supply,” said a dealer with a private bank. 

 

The 10-year benchmark paper opened nearly 90 paise down at 99.26 due to an erroneous trade, dealers said.

 

The benchmark 6.45%, 2029 bond remained a laggard compared with its peers in the 10-14 year segment as market participants expect the paper to lose its benchmark status with its net outstanding reaching close to 1 trln rupees, dealers said.

 

Traders believed that supply of the paper will increase due to switch operations, which could take the net outstanding on the paper near the government’s informal borrowing limit of 1.2 trln rupees through a single dated security.

 

The current outstanding on the 10-year benchmark bond stands at 958.40 bln rupees, according to data available on the Reserve Bank of India’s website.

 

The Centre has already conducted 1.28 trln rupees worth of switches this financial year, higher than the budgeted target of 500 bln rupees. The government has revised the target for gilt switches in 2019-20 (Apr-Mar) to 1.65 trln rupees.

 

In a switch operation, the government issues long-term bonds in lieu of short-term papers, effectively postponing debt repayments.

 

Yield on the 10-year benchmark is seen in a band of 6.40-6.45%, during the day, dealers said.  (Vaibhav Chakraborty)


India Gilts:Seen up; mood upbeat post RBI’s step on surplus liquidity

 

NEW DELHI – Government bond prices are likely to rise today as the mood in the market remains upbeat post Reserve Bank of India’s stance on liquidity despite a higher-than-expected rise in headline inflation in January.

 

India’s Consumer Price Index-based inflation rose to a 68-month high of 7.59% in January as against 7.35% in December.

 

The RBI last week, made some unprecedented changes in its existing liquidity management framework, a move that may help to improve transmission of 135-basis-point rate cut made by the central bank in 2019.

 

Last week the RBI’s Monetary Policy Committee unanimously kept the repo rate unchanged at 5.15%, citing a rise in headline inflation. In December and January, the CPI-based inflation had risen past the central bank’s mandated comfort range of 2-6%.

 

The central bank tweaked certain provisions in its current liquidity management framework. 

 

The revised liquidity management framework also did not call for liquidity in a “close-to-neutral” deficit, which was the case earlier, and removed quantitative ceilings on surplus liquidity.

 

Moreover, the RBI’s decision to conduct long-term repo operations also supported the appetite for dated securities. The central bank announced to conduct one-year and three-year repo operations, through which it would lend up to 1 trln rupees at the current repo rate of 5.15%, to improve transmission of interest rates.

 

The first long-term repo auction will be held on Monday for a quantum of 250 bln rupees and tenure of three years. This will be followed by a 250-bln-rupee one-year repo operation on Feb 24.

 

Moreover, a weak industrial output data suggests that the slowdown in the economy still persists. India’s industrial output for December contracted by 0.3%, far below the consensus . A contraction in industrial output indicates investment and consumption demand in the economy still remains sluggish. Industrial output grew 1.8% in November.

 

Yield on the 10-year benchmark is seen in a band of 6.40-6.45% as against 6.43% at close on Thursday.  (Vaibhav Chakraborty)  End

 

US$1 = 71.3600 rupees at 1700 IST

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

 

Edited by Arshad Hussain

 

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