Informist, Monday, Oct 4, 2021

By Nikhil Patwardhan

MUMBAI – Government bonds ended steady today, while trade volumes were low because dealers preferred staying on the sidelines due to caution ahead of Reserve Bank of India's three-day monetary policy meeting, which starts on Wednesday.

The 10-year benchmark 6.10%, 2031 bond ended at 98.92 rupees or 6.25% yield, as against 98.95 rupees or 6.24% yield on Friday.

The market expects the monetary policy committee to leave the benchmark repo rate and its accommodative stance unchanged. But with the RBI aggressively ramping up its liquidity management operations lately, some sections of the market believe that the central bank could well hike the reverse repo rate, which has been the operative policy rate amid surplus liquidity in the banking system. 

The expectations follow a higher-than-expected cutoff at the RBI's latest seven-day variable rate reverse repo auction, set at the highest possible rate of 3.99%. The move has spooked certain sections of the market as traders interpreted it as RBI nudging short-term rates higher. Moreover, the market is also waiting to see if the central bank further increases the tenor of its variable rate reverse repo operations.

Currently, the RBI has been conducting 3-, 4-, 7-, and 14-day variable rate reverse repo operations. Some dealers now expect the central bank to increase the tenor to even 56 days.

"At the last auction, the one-year T-bill (treasury bill) rate or rather all T-bills certainly factored in the recent actions of the RBI, which hinted at some sort of liquidity normalisation," said a head of treasury of a primary dealership.

"So that will have likewise impact on five-year or shorter-tenure gilts, but the supply is less (in Oct-Mar) which is in its favour. So while there will be some pressure on five-year gilts, the less-supply factor would be helpful, but we need to see what RBI does on liquidity and G-SAP (government securities acquisition programme) at the policy." 

The other major takeaway from the upcoming policy would be whether the central bank decides to taper down its outright gilt purchases under the government securities acquisition programme as the management of massive liquidity surplus in the banking system is seen becoming untenable, dealers said.

The central bank had offered to buy gilts worth 1 trln rupees in Apr-Jun and 1.2 trln rupees in Jul-Sep. While some dealers believe that the RBI would discontinue outright gilt purchases under the plan, some believe that the central bank would reduce the quantum.

"RBI and the government both have time and again kept saying that the withdrawal of liquidity would be gradual or rather they aren't really rushing to tighten it," said Arvind Kanagasabai, head of treasury at Bandhan Bank.

"So I think they will not totally stop G-SAP (government securities acquisition programme) to make sure there's some infusion of durable liquidity happening which they can absorb through longer VRRRs (variable rate reverse repo auctions) but then quantum will be much lower, and they might do more OTs (Operation Twists)."
 

According to data on the RBI's Negotiated Dealing System - Order Matching Platform, the market-wide turnover was 185.70 bln rupees, as against 279.60 bln rupees on Friday.

OUTLOOK

On Tuesday, government bonds are seen opening steady in the run-up to the RBI's policy review meeting starting Wednesday.

Traders may avoid aggressive bets on short-term gilts amid fear that the central bank could take further measures that would push up short-term rates.

Any sharp movement in US Treasury yields and crude oil prices overnight may guide domestic bonds early in trade.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.21-6.27% on Tuesday.

India Gilts: Steady in thin trade on caution ahead of RBI MPC meet

India Gilts: Steady in thin trade on caution ahead of RBI MPC meet

MUMBAI--1400 IST--Government bonds were steady with low traded volumes because dealers stayed on the sidelines due to caution ahead of the Reserve Bank of India's Monetary Policy Committee meeting starting Wednesday.

While most traders do not expect the MPC to hike the benchmark repo rate which is currently at 4%, they see a possibility of other measures that could push up the cost of funds by increasing the rate of interest that banks earn on parking money with the RBI.

Certain sections of the market believe the central bank will hike the reverse repo rate, which has been the operative policy rate due to excess liquidity in the banking system. On other hand, some expect the central bank to extend the duration of its variable rate reverse repo operations to up to 56 days from the current tenures of 3, 4, 7, and 14 days. The market also remains divided on whether the central bank would stop, reduce or continue with its large purchases of gilts, under the government securities acquisition programme that it had started in April.

"The yield on the 10-year bond won't top the 6.25% mark before the policy I believe because there are many questions which need to be answered in the policy, so no one would want to bet very aggressively," said a dealer with a private bank.

"Even if the RBI stops G-SAP (government securities acquisition programme), it will continue with OTs (Operation Twists) and OMOs (open market operations) to keep yields anchored in the December quarter, so I guess there are not many reasons for the 10-year yield to rise sharply, but before there's any clarity on this, we won't see large bets."

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.22-6.27% during the day.  (Nikhil Patwardhan)

India Gilts: Steady as traders avoid large bets ahead of RBI MPC meet

India Gilts: Steady as traders avoid large bets ahead of RBI MPC meet

NEW DELHI--1055 IST--Government bonds were steady as traders avoided large bets on caution in the run-up to the Reserve Bank of India's Monetary Policy Committee meeting starting Wednesday.

The three-day review meet would lay out cues for gilts in the near term, due to uncertainty over RBI's plans for likely normalisation of its ultra-accommodative monetary policy, dealers said.

Investors were concerned that the central bank would either ramp up its liquidity management operations by absorbing cash for longer tenures, or initiate a hike in the reverse repo rate, which has become the effective overnight policy rate due to the excess liquidity in the financial system.

Traders held on to the short bets they had taken last week as fears of normalisation mounted. Further, traders kept to the sidelines despite a sharp fall in gilts in the previous week, as they look to keep their trading portfolios light ahead of the outcome of the policy on Friday, dealers said.

"Mostly, there is just caution before the MPC meeting, some small volume value buying is coming in the 5.63%, 2026 bond, but I don't think it's going to trigger any strong demand before policy gives us more clarity," a dealer at a foreign bank said.

"On the other hand, market already sold off last week because of reverse repo (hike) fears so that's priced in, limiting downside," the dealer said.

Yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.21-6.27% during the day.  (Aaryan Khanna)

India Gilts: Seen steady on caution ahead of RBI policy meet

NEW DELHI – Government bonds are seen steady because traders are likely to stay on the sidelines due to caution ahead of the Reserve Bank of India's October policy review, which starts from Wednesday.

With the section of the market divided over the pace of policy normalisation that the RBI may resort to on Friday, market is likely to tread with caution and will avoid adding or trimming substantial quantum of bonds on their portfolios. 

While RBI officials have reassured the market in their recent media interactions about continuing policy accommodation, traders fear the central bank may be nudging short-term rates higher and setting the stage for a reverse repo hike or longer maturity variable rate reverse repo, after the ramping up of its liquidity operations in September, dealers said.

Over the previous week, money market rates and short-term gilt yields have shot up after the RBI on Tuesday set the cut-off for its seven-day variable rate reverse repo auction worth 2 trln rupees at the highest possible rate of 3.99%. Further, rates were on an upward trajectory after some banks, including Citi, moved up their expectations of a 15-basis-point rate hike to October from December.

Traders are looking to keep their portfolios unusually light to limit the damage from any additional normalisation measures by the RBI, whether on the liquidity front or through a hike in the reverse repo rate, which could see gilts trade on a weak note ahead of the policy, dealers said.

Meanwhile, global cues were mixed and not expected to not provide a large impetus to domestic gilt prices. However, some dealers may take bets on the trajectory of global factors due to the lack of significant domestic cues, dealers said.

Concerns that members of the Organization of Petroleum Exporting Countries would not step up its pace of increasing supply despite higher prices led to a rise in crude prices. The Brent crude oil futures contract for December rose over $1 per barrel on Friday to settle at $79.28.

However, the yield on the 10-year US Treasury note fell below the psychologically-crucial 1.50%-mark to end at 1.48% on Friday, which could help domestic gilts. A fall in US Treasury yields widens the interest rate differential between the safe-haven asset and emerging market debt, making the latter more appealing for foreign investors.

The yield on the 10-year benchmark 6.10%, 2031 bond is seen at 6.21-6.27% during the day.  (Aaryan Khanna)

End

US$1 = 74.31 rupees

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

Edited by Shirsha Thakur

Cogencis news is now Informist. 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.

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

© Informist Media Pvt. Ltd. 2021. All rights reserved.