Informist, Tuesday, Dec 5, 2023
By M.C. Adhiinthran and Aaryan Khanna
MUMBAI – Prices of government bonds ended higher on bets the Reserve Bank of India’s Monetary Policy Committee would soften its tone on keeping monetary policy restrictive, although gains were limited ahead of the panel’s three-day meeting starting Wednesday, dealers said.
The 10-year benchmark 7.18%, 2033 bond closed at 99.46 rupees, or 7.26% yield, against 99.37 rupees, or 7.27% yield, on Monday.
Dealers speculated some state-owned banks bought gilts today as they expect the yields to fall going forward, making current levels lucrative for their asset-liability management needs. These investors do not expect open market sales of bonds through auction until the end of January, dealers said.
Foreign portfolio investors bought a chunk of the 7.18%, 2033 bond during the day, which pushed up the 10-year bond’s price to the day’s high, dealers said. However, traders were cautious before the domestic rate-setting panel’s meeting and disregarded the move, which also ebbed by the end of the day as the inflows reversed, dealers said.
The bets on a softer tone at the policy were hardly unanimous, which led to trade volumes rising after a sluggish start. Another section of the market still expects the domestic rate-setting panel to stick to its tight monetary policy outlook as inflation was expected to tick higher in November, and growth momentum remained robust.
In data released last week, India’s Jul-Sep GDP grew at 7.6% on year, firmly beating the estimate of 6.8% in an Informist poll of 21 economists.
“To be honest, I can’t see the governor taking a dovish stance at all,” a dealer at a state-owned bank said. “At this juncture, he is comfortable with the (yield) levels so I don’t see him doing anything positive for the market this time around.”
In recent weeks, comments from US Federal Reserve officials have suggested that the Federal Open Market Committee will no longer hike rates, and that the panel could be on the verge of a rate cut much sooner than expected. According to the CMEGroup’s FedWatch tool, over half of Fed funds’ futures traders anticipate the first US rate cut by March.
US Fed Chair Jerome Powell said on Friday that tight monetary policy has been successful in slowing down the US economy and the risks of over- and under-tightening are now fairly balanced.
“It is difficult to trade on US momentum alone,” a dealer at a foreign bank said. “If there is no softening on policy this week, which actually looks unlikely considering the macro here, then gilt prices can’t trade here with such optimism.”
State-owned banks have avoided trimming their bond holdings even to book profit as they load up their held-to-maturity portfolios ahead of new norms on their investment portfolios starting in April, dealers said. At the same time, this has curtailed appetite for fresh securities at the debt sales, leading to flagging demand.
Most banks intend to run up their held-to-maturity portfolios to the current limit of 23% of net demand and time liabilities to benefit from a one-time shifting from that bucket to the available-for-sale books to lock in capital gains while minimising potential marked-to-market losses until March, dealers said.
The new norms remove the 90-day ceiling on holding period under held-for-trading books and the statutory ceiling on held-to-maturity bonds.
Meanwhile, other segments of the market such as mutual funds and insurance companies also prefer to stock up on state bonds rather than government securities as current yields levels are considered lucrative. Investors have also demanded higher returns amid tight liquidity in the financial system over the last two months, dealers said.
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the turnover was 356.55 bln rupees, compared with 324.10 bln rupees on Monday. There were no trades today using the wholesale digital rupee pilot, as against four trades worth 200 mln rupees on the previous day.
OUTLOOK
On Wednesday, gilt prices are seen opening steady as traders may avoid aggressive bets ahead of the start of the three-day Monetary Policy Committee meeting, dealers said.
The RBI’s rate-setting panel is expected to maintain status quo on the repo rate and its policy stance, but could up its growth projection by up to 20 basis points for 2023-24 (Apr-Mar), dealers said.
A sharp move in US Treasury yields and crude oil prices may also lend cues at opening.
The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.24-7.31%.
India Gilts: Most in thin band; market cautious ahead of MPC 3-day meet
MUMBAI–1537 IST–Prices of most government bonds traded in a thin band as the market remained cautious ahead of the Reserve Bank of India’s Monetary Policy Committee meeting, which starts on Wednesday, dealers said. Among on-the-run gilts, the benchmark 7.18%, 2037 bond rose the most.
Gilts prices inched upwards on some buying from foreign portfolio investors, dealers said. According to the Clearing Corp of India Ltd, FPI investments in government securities through the general route were 651.96 bln rupees today, against 649.78 bln rupees on Monday.
However, the upward movement in price failed to facilitate active buying and selling momentum owing to caution before the domestic rate-setting panel’s meeting.
“Before MPC, people do not like to take fresh positions because, from the last 2-3 MPC meetings, the RBI has been coming up with surprises,” a dealer at a state-owned bank said. “The market does not want to be on the wrong side before the MPC, so they go light before the meet.”
Though the market expects the MPC meeting to be a non-event, it will observe the tone of RBI Governor Shaktikanta Das’s speech. A section of the market expects the MPC to provide an eased monetary policy outlook given the lack of open market operations sales so far and expectation of the interest rate peaking in the US, dealers said.
Another section believes the MPC may come up with a tight monetary policy outlook given recently released higher-than-expected growth data and expectation of an uptick in inflation in November, dealers said. India’s Jul-Sep GDP growth was at 7.6%, way higher than the estimate of 6.8%.
When it comes to the repo rate and the policy stance, the market expects the panel to keep them unchanged, dealers said. Currently, the repo rate is at 6.50% and the RBI has maintained a ‘withdrawal of accomodation’ stance. The market expects the decision on the repo rate to be unanimous, but sees external member Jayanth Varma refraining from voting on the stance.
According to data on the RBI’s Negotiated Dealing System-Order Matching platform, the marketwide turnover was 270.06 bln rupees at 1537 IST, against 271.10 bln rupees at 1530 IST on Monday.
For the rest of the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.24-7.30%. (Anupreksha Jain)
India Gilts: Up; traders cautious ahead of MPC meet Wed-Fri
MUMBAI–1315 IST–Prices of government bonds rose in thin trade. Some dealers said traders stepped up purchase of gilts as they view the Reserve Bank of India’s Monetary Policy Committee may give an eased monetary policy outlook in its upcoming three-day meeting, scheduled from Wednesday onwards.
While others said some state-owned banks bought the benchmark 7.18%, 2033 paper as they expect the yields to fall going forward, making current yields lucrative for their asset-liability management needs. Investors that do not expect any open market operations sale auction any time soon, see yields easing from here onwards, dealers said.
Despite the buying momentum, the rise was limited as the market remained cautious ahead of the domestic rate-setting panel’s 3-day meeting, starting Wednesday.
“Trade volume is low right now, but it is possible that traders are buying at these levels,” a dealer at a private bank said. “If the RBI (Reserve Bank of India) governor hints at an ease in monetary policy going forward, what then? Which is why they might be buying now.”
Trade volumes remained low, and were concentrated on the benchmark 10-year bond. Short-term bonds have been out of favour due to the prevailing tight liquidity in the banking system. At the end of Monday, liquidity in the banking system was in a surplus of 63.78 bln rupees.
Dealers speculated private banks would be on the selling side as they might lighten their trading portfolio ahead of the MPC meeting.
The MPC meeting is largely expected to be a non-event, when it comes to the repo rate and the policy stance, as they expect it to remain unchanged, dealers said. Currently, the repo rate is at 6.50% and the RBI has maintained a ‘withdrawal of accomodation’ stance.
Moreover, the market remained cautious due to liquidity-related surprises at the last two meetings, dealers said. In the October policy, the RBI Governor Shaktikanta Das said the central bank was considering open market operations sale auctions to drain liquidity.
According to data on the RBI’s Negotiated Dealing System–Order Matching platform–the market-wide turnover was 180.45 bln rupees at 1315 IST compared to 170.85 bln rupees at 1400 IST on Monday.
During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.24-7.30%. (M.C. Adhiinthran)
India Gilts: Little changed ahead of MPC meet Wed-Fri; volume low
MUMBAI–0930 IST–Prices of government bonds were little changed as traders avoided placing aggressive bets ahead of a meeting of the Reserve Bank of India’s Monetary Policy Committee, scheduled for Wed-Fri, dealers said.
Trade volume also remained low, and was concentrated in the benchmark 7.18%, 2033 bond. Short-term bonds have been out of favour due to the prevailing tight liquidity in the banking system. At the end of Monday, liquidity in the banking system was in a surplus of 63.78 bln rupees.
“It’s a dull day because there is policy ahead. US yields have also not moved much,” a dealer at a private bank said. “Except for the RBI’s comments on the OMO (sale auction) and liquidity condition, there is not much expected from this policy.”
The market is unanimous that the domestic rate-setting panel will keep the policy repo rate and policy stance unchanged for a fifth consecutive time at the outcome of its meeting on Friday, even though higher food prices pose an upside risk to inflation.
All 25 respondents in an Informist poll of economists, treasury heads, and analysts expect the rate-setting panel to keep the repo rate unchanged at 6.50% and maintain the ‘withdrawal of accommodation’ stance at the end of its three-day meeting.
Even as the market expects the upcoming policy meeting to largely be a non-event, it remained cautious due to liquidity related surprises at the last two meetings, dealers said.
In the October policy, RBI Governor Shaktikanta Das said the central bank was considering OMO sale auctions to drain liquidity. In the August policy, the central bank had imposed a 10% incremental cash reserve ratio on an increase in scheduled banks’ net demand and time liabilities between May 19 and Jul 28.
According to data on the RBI’s Negotiated Dealing System–Order Matching platform–the market-wide turnover was 37.00 bln rupees compared with 64.40 bln rupees at 0930 IST on Monday.
During the day, the yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.24-7.30%. (Nishat Anjum)
India Gilts: Seen steady on caution ahead of 3-day MPC meet from Wed
MUMBAI – Prices of government bonds are seen opening steady as traders may refrain from placing aggressive bets ahead of a three-day meeting of the Reserve Bank of India’s Monetary Policy Committee, starting Wednesday. However, an uptick in US Treasury yields may weigh on bonds.
The yield on the 10-year benchmark 7.18%, 2033 bond is seen at 7.25-7.30% today, against 7.27% on Monday. Dealers speculated that during the day, state-owned banks may step up purchases if the yield on the paper reaches 7.28% levels.
The market widely expects the MPC to maintain status quo on the repo rate and the policy stance, dealers said. At the last policy meeting, the panel kept the repo rate unchanged at 6.50%, while maintaining a ‘withdrawal of accomodation’ stance.
Dealers said the market would keep a watch for clarity on open market auction sales and comments on liquidity in the banking system by the RBI. In the October policy, RBI Governor Shaktikanta Das had said the central bank was considering open market operation sale auctions to drain liquidity.
Surprises by the RBI at the past two policy reviews on the liquidity front may keep traders cautious, even as they are near unanimous in counting on a non-event on Friday, dealers said.
Meanwhile, during the day, the market may keep a close eye on US Treasury yields, dealers said. The yield on the benchmark 10-year US Treasury note rose to 4.26% in Asian trade today from 4.25% at Indian market close on Monday. A rise in US Treasury yields narrows the interest rate differential between the safe-haven asset and emerging market debt, making the latter less appealing to foreign investors.
On the global front, investors braced themselves for US non-farm payrolls data for November, due to be released on Friday. The data is expected to show that the American economy added 180,000 jobs last month, up from 150,000 in October. However, traders continued to price in the possibility of a policy rate cut by March next year, following their dovish interpretation of Fed Chair Jerome Powell’s comments last week.
Market participants expect the Fed to keep rates unchanged at its policy meeting next week. At the Federal Open Market Committee meeting scheduled for Dec 12-13, 97.7% of Fed funds futures traders expect the US rate-setting panel to maintain status quo. Since March 2022, the Fed has hiked its policy rate by 525 basis points to the current 5.25-5.50% range. (Siddhi Chauhan)
End
IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT
Edited by Maheswaran Parameswaran
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