India Gilts: Pare gains on profit booking, caution over govt finances

NEW DELHI–-1500 IST–-Government bonds pared some gains because traders booked profits on view that prices may not rise significantly in the near term, given the concerns over the government's strained finances and the possibility of fiscal measures to revive economic growth, dealers said. 

Traders were cautious over the government's next move to revive the trudging domestic economic growth, which had fallen to a 25-quarter low of 5.0% in Apr-Jun, according to data released after market hours on Friday. The data print was sharply below a Cogencis poll estimate of 5.6%. 

Even as weak economic growth backs the case for a further cut in interest rates, the sharp extent of the current slowdown might prompt the government to chip in with fiscal measures as well.

Earlier today, bond prices had risen sharply on view that the Reserve Bank of India would ease its monetary policy further to salvage growth. 

"After the GDP data, a fresh stimulus can be expected and that is weighing on prices," a dealer with a state-owned bank said. "There is uncertainty over how the RBI surplus transfer will be used because the government has not said anything on it."

The central bank will transfer a total of 1.48 trln rupees to the government this year, including 526.37 bln rupees of excess contingent reserve buffers. The government had budgeted 900 bln rupees as surplus transfer from the RBI for 2019-20 (Apr-Mar). Market participants expect the additional funds to make up for the shortfall in revenue due to slowing economic growth.

"It has become tricky because of the fiscal worries because on one hand tax revenues are falling short and then the GDP is also falling sharply so some spending can be expected," a dealer with a private bank said. 

Fiscal slippage might prompt the government to upwardly revise its market borrowing, which would entail an additional supply of bonds.

Bond prices were also said to have been weighed by sharp fall in the Indian unit, which has weakened over 1% against the US dollar today.

Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.50-6.55% for the rest of the day, dealers said. (Suyash Pande)

India Gilts: Up as GDP slump boosts rate cut hope; weak rupee weighs

NEW DELHI–-0930 IST–-Government bonds rose sharply because the slump in India's GDP growth in Apr-Jun strengthened expectation of the Reserve Bank of India lowering interest rates, dealers said.

Data released after trading hours on Friday showed that GDP grew at 5.0% in the June quarter, the slowest pace in 25 quarters. Money markets were shut on Monday for Ganesh Chaturthi.

GDP had grown 5.8% in Jan-Mar and 8.0% in Apr-Jun last year. The Apr-Jun GDP number was much below the 5.6% estimated by a Cogencis poll of 22 economists.

With Consumer Price Index-based inflation remaining well below the RBI's medium-term target of 4.00%, the latest GDP data may prompt the central bank to lower interest rates as soon as its next monetary policy review in early October. So far in 2019, the RBI has lowered the repo rate by a cumulative 110 basis points, marking the longest spell of monetary policy easing since 2015.

"The Apr-Jun GDP figure is far lower than market expectations and to that extent, an October rate cut is now a done deal," a dealer with a primary dealership said. "Before

the data, most traders were doubting whether there would be five successive rate cuts, but with such a growth slowdown there is little option for the central bank but to cut," he said.

Even as bonds were up, the rupee's weakness versus the US dollar capped the gains, dealers said. The rupee was last at 72.0675 per dollar, around 0.9% weaker than previous close.

The domestic currency's weakness led to speculation of foreign portfolio investors unwinding their investments in Indian sovereign debt. A weak rupee eats into FPIs' gains from Indian debt, reducing the appeal of these investments.

Heavy profit booking, likely by state-owned banks, also kept gains in check. Once yield on the 10-year benchmark 7.26%, 2029 paper fell below the psychologically significant 6.50% level, state-owned banks were said to have aggressively locked in trading gains. These banks, which are among the largest holders of bonds, typically sell when prices rise thereby setting a floor for yields.

Later in the day, gilts could take cues from the result of today's state bond auction where 14 states have offered to raise 182 bln rupees.

Yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.50-6.53% for the rest of the day, dealers said. (Suyash Pande and Vaibhav Chakraborty)

India Gilts: Seen sharply up as GDP slump strengthens rate cut hope

NEW DELHI – Government bonds are likely to open sharply higher today because the slump in India's GDP growth in Apr-Jun strengthens the case for the Reserve Bank of India to lower interest rates over the near term.

Data released after trading hours on Friday showed that GDP grew at 5.0% in the June quarter, the slowest pace in 25 quarters. GDP had grown 5.8% in Jan-Mar and 8.0% in Apr-Jun last year. The Apr-Jun GDP number was well below the 5.6% estimated by a Cogencis poll of 22 economists. Money markets were shut on Monday for Ganesh Chaturthi.

With Consumer Price Index-based inflation remaining well below the RBI's medium-term target of 4.00%, the latest GDP data may prompt the central bank to lower interest rates as soon as its next monetary policy review in early October. So far in 2019, the RBI has lowered the repo rate by a cumulative 110 basis points, marking the longest spell of monetary policy easing since 2015.

Moreover, with the government recently indicating that it was not in favour of announcing fiscal stimulus to rev up the economy, bond traders are likely to bet on monetary policy doing the heavy lifting as far as growth is concerned.

Last month, Chief Economic Adviser K.V. Subramanian said the Centre cannot intervene and use tax payers' money every time there is a weakness in certain sectors.

Over the last couple of weeks, the Centre has announced a slew of measures to boost the slowing economy, but refrained from announcing any fresh spending measures that could lead to a deviation from the fiscal consolidation roadmap. The steps the government has announced include mergers of several state-owned banks and the rollback of a contentious enhanced surcharge on capital gains from equity investments.

For the bond market, a spending push by the Centre –- which could lead to a potential fiscal slippage –- brings with it the dreaded possibility of an increase in market borrowing. Given that the Centre is scheduled to sell 7.10 trln rupees worth of bonds on a gross basis this year, any additional supply of dated securities would be difficult for the market to absorb.

Today, yield on the 10-year benchmark 7.26%, 2029 paper is seen in a band of 6.44-6.50% as against 6.56% at close on Friday. (Suyash Pande and Bhaskar Dutta)  End

US$1 = 72.40 rupees

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

Edited by Arshad Hussain

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