Informist, Wednesday, May 21, 2025

By Aaryan Khanna

NEW DELHI – Government bond yields continued to fall in May on the back of large purchases from state-owned banks, which have emerged as the largest buyers in the secondary market this month. They also top the charts as secondary market buyers of both gilts and state-government bonds in the financial year started April. Bond traders said this was a reflection of the vaccuum of supply created by the Reserve Bank of India's aggressive open market operations.

The RBI has bought INR 5.23 trillion of gilts under its OMOs through both auctions and secondary market buys since January. In comparison, gross market borrowing through dated securities has totalled only INR 4.72 trillion calendar year-to-date, with a negative net supply of over INR 600 billion after accounting for a redemption in January.

State-owned banks have been the biggest beneficiary, often clearing out illiquid bonds from their held-to-maturity books at a profit at the auctions announced by the central bank, even after offering them at a discount to secondary market prices. This has led to them accruing most of the liquidity the central bank has added to the system. Clearing Corp. of India data showed they net bought nearly INR 300 billion of gilts in the secondary market in May and over INR 125 billion of state bonds as well.

"We have liquidity, and there's nowhere else to put it," a chief dealer at a state-owned bank said. "Very little is going to go to credit growth in the June quarter, so it is making its way to the (bond) market."

These purchases have been across maturities, though most banks said they had concentrated the buys in bonds either maturing under five years or in the 2031 to 2039 bucket where the RBI has conducted a bulk of their buys at OMO auction. These bonds have largely been picked up in the banks' held-for-trading and available-for-sale books. The only buys in held-to-maturity books have been bonds maturing within three years, dealers said.

"I have not seen PSU banks take such a front-foot in moving the market in my career," a dealer at a primary dealership, who has traded bonds for over two decades, said. "If they are trading like this, the market's appetite for a shock decreases if yields suddenly go up by 10-15 bps. But finding such a shock seems very difficult in the current environment."

Treasury desks preferred higher yielding quasi-sovereign state bonds in Jan-Mar due to their bloated supply of INR 4.34 trillion, which helped prevent an asset-liability mismatch from the negative net gilt supply. However, supply so far in Apr-Jun has undershot the indicative calendar by about 35% and has only been a little over INR 1 trillion. Out of necessity, public sector banks have turned to gilts, and helped the 10-year benchmark 6.79%, 2034 gilt's yield fall 34 basis points since March-end to 6.24% at 1350 IST.

Bond have also enjoyed an excellent run over the last few months with the RBI's Monetary Policy Committee cutting the policy repo rate by 50 basis points. The outlook for GDP growth is fraught with risk from geopolitical tensions, while inflation is seen in line with the RBI's 4% medium-term target through the financial year. This has led the market to factor in another 50 bps of rate cuts in the next few months, including a quarter percentage point moderation at the next MPC meeting in June. To be sure, bond yields are seen near the bottom, but the confluence of rate cuts and easy liquidity are likely to help the 10-year yield fall to at least 6.10% if not 6.00% by September, dealers said.

"If nothing else, we will get another 10-15 bps out of it (the 10-year gilt)," a chief dealer at another state-owned bank said. "These bonds are anyway in the trading book, so we can always sell them to private banks or foreigners when they come in to buy later in the year, and maybe credit demand starts picking up in the second half (Oct-Mar)." End

Edited by Akul Nishant Akhoury

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