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India Gilts Review: Dn on policy tightening fears on steep US CPI rise

Informist, Thursday, Jul 14, 2022

 

By Aaryan Khanna

 

NEW DELHI – Government bond prices fell today after the US CPI inflation print topped expectations and stoked fears of sharp monetary policy tightening globally and domestically, dealers said.

 

The 10-year benchmark 6.54%, 2032 bond settled at 94.31 rupees, or 7.38% yield, against 94.61 rupees or 7.34% yield on Wednesday.

 

CPI inflation in the US surged to 9.1% in June, a fresh four-decade high, above expectations of an 8.8% annual increase. 

 

Globally, investors are concerned that the US Federal Reserve may raise interest rate by as much as 100 basis points to combat the rising inflation at its meeting later this month. Nomura raised its forecast to a 100 bps increase from 75 bps, after the CPI print was released.

 

Consequently, the Reserve Bank of India’s Monetary Policy Committee may also raise the repo rate by more than 50 bps in August, dealers said. Domestic inflation topped the central bank’s medium-term target band of 2-6% for the sixth straight month in June.

 

While the gilts market was already pricing in a 50 bps rate hike, the central bank may take further policy tightening measures to protect asset prices, dealers said.

 

In addition to worries about inflation, a depreciating rupee also posed risks from a wide differential between the US and India policy rates, which indicated that the Monetary Policy Committee may opt for a sharp pace of rate hikes to match the US.

 

Today, the rupee fell to a fresh all-time low of 79.9150 a dollar, down nearly 7.5% against the greenback for the year.

 

“The RBI can enact extreme policy measures to prevent capital outflows to protect the currency, either through a 60-75 bps rate increase or something that tightens policy more than just a 50 bps increase,” a dealer at a primary dealership said.

 

Investors stepped up purchases as yield on the 10-year benchmark 6.54%, 2032 benchmark bond neared the 7.40% mark, dealers said. Moreover, losses were limited as crude oil prices slumped during the day, easing fears of imported inflation as the near-month Brent crude oil contract sustained under $100-a-barrel, dealers said.

 

The price of Brent crude oil plunged to a near four-month low today due to fears about a possible recession and expectation of a sharp hike in interest rates in the US, which could dampen demand for the commodity. 

 

By the end of Indian market hours, Brent crude oil for September delivery fell to a $97.66 a bbl, nearly $2 lower than Wednesday’s settlement.

 

Short sellers consistently placed bets during the day when prices recovered, ahead of the 320-bln-rupee weekly gilt auction on Friday.

 

The government has offered to sell 90 bln rupees of the 7.38%, 2027 gilt, 40 bln rupees of the 2028 floating rate bond, 100 bln rupees of the 7.54%, 2036 gilt, and 90 bln rupees of the 6.99%, 2051 gilt.

 

“The auction will pass through as it does, but I expect to see another 2-3 bps of a tail now that demand is stagnating and there is lesser space on the books,” a dealer at a state-owned bank said.

 

According to data on the RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover was 318.25 bln rupees, compared with 462.30 bln rupees on Wednesday.

 

OUTLOOK

On Friday, government bond prices may open steady on caution ahead of the 320-bln-rupee weekly gilt auction.

 

Prices may remain under pressure due to concerns that bond portfolios of investors may be nearing capacity, following muted demand for dated securities over the past two weekly gilt auctions, dealers said.

 

The government has offered to sell 90 bln rupees of the 7.38%, 2027 gilt, 40 bln rupees of the FRB 2028, 100 bln rupees of the 7.54%, 2036 gilt, and 90 bln rupees of the 6.99%, 2051 gilt.

 

Any overnight movement in crude oil prices and US Treasury yields may also lend early cues to domestic bonds.

 

Yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.35-7.45%.

 

 

Today

Wednesday

Price

Yield

Price

Yield

5.63%, 2026

 95.6900

 6.9544%

 95.8300

 6.9093%

5.74%, 2026

 95.2300

 7.0331%

 95.3900

 6.9877%

6.67%, 2035

 92.7125

 7.5419%

 93.1100

 7.4919%

7.54%, 2036 99.5050 7.5967% 99.9025 7.5498%6.54%, 2032 94.3100 7.3835% 94.6075 7.3376%

India Gilts: Remain down as OIS rises on tighter RBI policy view

 

 1400 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.54%, 2032PRICE (rupees)94.2394.5094.1594.4594.61YTM (%)      7.39587.35437.40817.36207.3376

 

NEW DELHI–1400 IST–Government bond prices slumped further as overnight indexed swap rates rose to the day’s high expecting a more aggressive pace of policy tightening by the Reserve Bank of India, dealers said.

 

The 1-year swap rate rose to 6.38% against 6.20% on Wednesday, while the 5-year OIS rate jumped 10 basis points to 6.58%.

 

Dealers feared the US Federal Reserve may hike policy rates by 100 bps at its policy review at the end of July, after US CPI print for June was above expectations.

 

Such an action could put pressure on the Monetary Policy Committee to raise the policy repo rate by over 50 bps at the August policy review. The RBI may also take additional steps to tighten policy and keep domestic asset prices high to prevent capital outflows and further depreciation in the rupee, which has plunged to record lows, dealers said.

 

Traders stepped up purchases as the yield on the 10-year benchmark 6.54%, 2032 bond rose to the psychologically-crucial 7.40% mark, dealers said.

 

“The pressure is because of OIS and US CPI, but there is a bit of volatility and defence of the 7.40% level (on the 10-year yield) because crude has come down,” a dealer at a primary dealership said.

 

Brent crude for September delivery slumped over 1% today and traded near $98.50-a-bbl, limiting losses in domestic gilts, dealers said.

 

Traders also placed short bets to make room for the 320-bln-rupee weekly gilt auction on Friday, dealers said.

 

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.37-7.42% during the day. (Aaryan Khanna)

India Gilts: Slump as US CPI stokes fears of 100-bps rate hike by Fed

 

 0930 IST  PRICE HIGH  PRICE LOW       OPEN    PREVIOUS6.54%, 2032PRICE (rupees)94.2494.5094.2294.4594.61YTM (%)      7.39507.35437.39737.36207.3376

 

NEW DELHI–0930 IST–Prices of government bonds plunged as higher-than-expected US CPI data for June stoked fears of a 100-basis-point rate hike by the US Federal Reserve at its next meeting, dealers said.

 

A 100-bps rate hike by the Fed may also force the Reserve Bank of India to hike rates by a greater quantum than previously expected, dealers said.

 

Inflation in the US reached 9.1% in June, the highest level since November 1981, and higher than the estimated 8.8% in a Reuters poll.

 

After the release of the US CPI data, domestic traders shifted their rate hike view from 25-50 bps to 50-75 bps for the August Monetary Policy Committee meeting.

 

“US investors are seeing 100-bps (hike) by the Fed now, which may force the RBI to hike rates by 50-75 bps to protect the rate differential from being too wide,” a dealer at a private bank said. 

 

Traders also made room for fresh supply, due on Friday, as the government looks to raise 320 bln rupees, dealers said.

 

The government has offered to sell 90 bln rupees of the 7.38%, 2027 gilt, 40 bln rupees of the 2028 floating rate bond, 100 bln rupees of the 7.54%, 2036 gilt, and 90 bln rupees of the 6.99%, 2051 gilt.

  

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.35-7.42%. (Shubham Rana)

India Gilts:Seen steady as softer crude may offset high US CPI impact

 

NEW DELHI – The prices of government bonds are seen opening steady today because softer crude oil prices may offset the impact of higher-than-expected inflation in the US.

 

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.31-7.40%, as against 7.34% on Wednesday.

 

Crude futures rose marginally on Wednesday, but stayed below the crucial $100 per barrel, even after the rise in US oil inventories and after US inflation figures strengthened the case for another big rate hike by the US Federal Reserve.

 

The Brent crude contract for September delivery was at $99.57 Wednesday per bbl against $99.49 on Tuesday.

 

Inflation in the US reached 9.1% in June, the highest level since November 1981, and higher than estimates of 8.8% from a Reuters poll.

 

The consumer-price index’s reading for June was higher than May’s annual rate of 8.6% that led the US Federal Reserve officials to shift to a faster pace of interest rate increases.

 

The yield on the 10-year benchmark US Treasury note rose on Wednesday as higher-than-expected June CPI data sparked concern that the central bank may go for a 100-basis-point supersized rate hike later this month to tame soaring inflation. However, the yield on the 10-year US Treasury note came down and fell sharply to end at 2.91%.

 

During the day, traders may place short bets to make room for the weekly gilt auction on Friday, dealers said.

 

The government has offered to sell 90 bln rupees of the 7.38%, 2027 gilt, 40 bln rupees of the 2028 floating rate bond, 100 bln rupees of the 7.54%, 2036 gilt, and 90 bln rupees of the 6.99%, 2051 gilt.  (Shubham Rana)

 

End

 

US$1 = 79.88 rupees

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

 

Edited by Aditya Sakorkar

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

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Source: Cogencis

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