Informist, Monday, Dec 6, 2021
By Vaibhav Chakraborty
NEW DELHI – Government bonds ended steady today on caution ahead of the Reserve Bank of India’s monetary policy statement on Wednesday, which could clear the uncertainty about the near-term view on interest rates, dealers said.
The 10-year benchmark 6.10%, 2031 bond ended at 98.15 rupees or 6.36% yield, against 98.08 rupees or 6.37% on Friday.
Government bonds have been volatile over the past month as record-high inflation globally led to expectations that central banks could tighten their monetary policies faster than expected, dealers said.
Since CPI inflation in the US touched a three-decade high in October, US Federal Reserve officials have been suggesting that the central bank consider early tapering of its asset purchases and set the floor for eventual rate hikes to curb the threats posed by rising inflation, dealers said.
Domestically, the market had been expecting the RBI to hike the reverse repo rate at its policy meet which began today, and provide guidance over the course of normalisation going ahead, dealers said.
“Right now it is difficult to call which side the RBI will tilt to, and that uncertainty is also visible in the way volumes have dropped since last week,” a dealer with a state-owned bank said.
However, the view on central banks accelerating the pace of normalisation has shifted since the fag-end of November following the detection of Omicron variant of COVID-19, which has been traced in several countries since, dealers said.
The new variant has become a cause of concern for the market and central banks alike as it may to disrupt the nascent economic recovery if authorities begin reimposing restrictions, dealers said.
With global growth momentum still fragile amid supply-side bottlenecks, a downside risk to economic recovery could prompt central banks, including the RBI, to remain accommodative till there is more clarity on the economic impact of Omicron, dealers said.
A wide section of the market believes the RBI has room to hike the reverse repo rate by 15-25 basis points at this policy meet while sounding cautious over the new variant.
“There is a possibility of reverse repo hike, but we cannot be sure at this point what can be the impact of virus neither can the central banks, so it would be safe to say that maintaining an accommodative stance would be the sensible thing to do with some caveat on the path of normalisation based on how the situation evolves,” a dealer with a private bank said.
However, others in the market are of the view that since information on the impact of the new variant and effectiveness of the current vaccines against it is limited, the central bank may remain accommodative and refrain from hiking the reverse repo, dealers said.
Meanwhile, despite the caution ahead of the policy statement, a fall in US Treasury yields on Friday supported gilt prices during the day today, dealers said.
US bond yields have tanked since the detection and spread of Omicron the world over as investors have started opting for haven assets. Yield on the 10-year US Treasury note fell 9 bps on Friday to 1.35%.
According to data on RBI’s Negotiated Dealing System – Order Matching platform, the market-wide turnover today was 169.40 bln rupees against 138.55 bln rupees on Friday.
OUTLOOK
Government bonds are likely to open steady on Tuesday because traders may refrain from placing large bets ahead of the RBI’s monetary statement on Wednesday.
Traders may be cautious due to the recent volatility as they await more details about Omicron.
Any sharp movement in US Treasury yields and crude oil prices might also lend cues at open.
On Tuesday, yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.33-6.38%.
India Gilts: In thin band amid low volumes as RBI policy in focus
NEW DELHI–1435 IST–Government bonds were confined to a narrow band amid muted trade volumes as traders were cautious due to uncertainty over the course of monetary policy in the near term, ahead of the Reserve Bank of India’s policy review outcome on Wednesday, dealers said.
With the number of Omicron cases rising across the world at a rapid pace, the market is wary that central banks may maintain status quo on policy due to the downside risks posed by the new coronavirus variant, dealers said.
“…was expecting the bonds to rally a bit due to US yields but looks like there is very little interest in the market ahead of policy. There are hardly any volumes and as foreign banks are closing their books for the year, that has also impacted volumes,” a dealer with a primary dealership said.
Meanwhile, the US Federal Reserve Chair Jerome Powell also raised concerns about the elevated inflation that could pose a risk to the nascent economic growth, and could accelerate tapering its asset purchases that may set the floor for eventual rate hikes, dealers said.
Earlier, the market was pricing in a likely hike in the reverse repo rate by the Reverse Bank of India at the upcoming policy, and guidance from the central bank about the path of normalisation, dealers said. However, since the detection of the new variant, the market is split over whether the RBI will normalise the Liquidity Adjustment Facility corridor amid limited information about the impact of the virus, dealers said.
“This time there is absolutely no certainty over what will be the course of RBI’s policy–will they hike reverse repo while being watchful of Omicron or would they just carry on with the current policy as the risks of the new variant are not yet known,” the dealer said.
Moreover, the market may also gauge the growth and inflation projections, with the RBI expected to raise the growth projections and lower the inflation projection for the ongoing quarter, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.35-6.40%. (Vaibhav Chakraborty)
India Gilts: Steady; caution before RBI policy offsets slump in US ylds
NEW DELHI–1035 IST–Government bonds were steady as traders avoided large bets ahead of the Reserve Bank of India’s policy review outcome on Wednesday, despite a slump in US yields supporting prices, dealers said.
The market remained split on whether the central bank would continue with a benign normalisation of monetary policy in the face of the new Omicron strain of COVID-19, and awaited the RBI’s decision on whether it would hike the reverse repo rate, dealers said.
Meanwhile, US bond yields slid on Friday as investors overseas flocked to haven assets due to concerns over the spread of the Omicron variant and its impact on the nascent economic recovery. The yield on the 10-year US Treasury note slid 9 basis points on Friday to 1.35%, and was at 1.38% in Asian trade today.
“US yields are supportive, but not many people are going to make moves before the (RBI) policy decision, along with other factors like US inflation this week and Fed tapering commentary,” a dealer at a private bank said.
Moreover, traders were wary of stocking up on gilts after the government sought Parliament’s approval on Friday to spend a net additional 2.99 trln rupees this financial year.
The additional expenditure raised concerns that the government may overshoot its fiscal deficit target even as the Centre was estimated to have been sitting on a cash balance of over 4 trln rupees at the end of October which it may use to fund the expenditure, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.34-6.40%. (Aaryan Khanna)
India Gilts: Seen up on slump in US ylds; RBI policy outcome Wed eyed
NEW DELHI – Government bonds are seen opening slightly higher, tracking a slump in US Treasury yields due to the impact of Omicron variant of COVID-19 on economic growth, as several countries have tightened travel restrictions in an attempt to contain the spread of the virus.
On Friday, International Monetary Fund Managing Director Kristalina Georgieva said the organisation’s global economic growth projections are likely to be downgraded due to emergence of the new variant of COVID-19.
The yield on the 10-year US Treasury note slid 9 basis points on Friday to 1.35%, and was at 1.38% in Asian trade today. A fall in US Treasury yields widens the interest rate differential between the haven asset and emerging market debt, making the latter more appealing for foreign investors.
The unemployment rate in the US fell to 4.2% in November from 4.6% in October, even as data by the US Labor Department on Friday showed US employers added a seasonally adjusted 210,000 jobs in November, sharply lower than 573,000 jobs estimated by economists surveyed by The Wall Street Journal.
Yields fell despite most analysts saying the employment data is unlikely to alter the Federal Reserve’s plan to accelerate the scaling back of its monthly bond purchases at the next meeting of policymakers on Dec 14-15. Fed Chair Jerome Powell and other policymakers have suggested a faster tapering of asset purchases to combat rising inflation pressures.
Any gains may be limited by caution on the domestic front, as the Reserve Bank of India’s December policy review kicks off today. Traders may keep to the sidelines before the Monetary Policy Committee meeting’s outcome on Wednesday, dealers said.
The market remained split on whether the central bank would continue with a benign normalisation of monetary policy in the face of the new Omicron strain.
Half the respondents in a poll of 32 economists, treasurers, and mutual fund managers by Informist see the reverse repo rate being increased by 15-40 bps from its current level of 3.35%, with the other half saying there would be no change.
Gilt prices may surge should the central bank hold off on hiking the reverse repo rate, dealers said.
The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.34-6.40%. (Aaryan Khanna)
End
US$1 = 75.42 rupees
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Aditya Sakorkar
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