Informist, Friday, Aug 5, 2022

By Aaryan Khanna

NEW DELHI – Government bond yields soared after the Reserve Bank of India's Monetary Policy Committee raised the repo rate by a higher-than-expected quantum today, dealers said. Further, comments by central bank officials indicated a focus on controlling high inflation, dampening market sentiment.

Today, the 10-year benchmark 6.54%, 2032 bond settled at 94.87 rupees, or 7.30% yield, as against 95.81 rupees, or 7.16% yield, on Thursday. This was the largest single-day jump in the benchmark yield since May 4, the day of the off-cycle repo rate hike.

The rate-setting panel increased the repo rate by 50 basis points as against expectations of a more moderate 35-bps hike. Consequently, the market had priced in that quantum and traders pushed up the yield due to the difference in the rate hike quantum, dealers said.

In the run-up to the policy, the rate hike view moderated to 35 bps from 50 bps as commodity prices eased and inflation was seen having peaked in the quarter ended June.

In a poll by Informist earlier this week, all 30 respondents expected the rate-setting panel to raise the repo rate, but the divide on the quantum was clearly visible.

While a dozen respondents expected the repo rate to be hiked exactly by 50 bps, 11 saw a hike of 35 bps, two of 25 bps, and one of 40 bps. The other four respondents gave a range for the hike--two saw a hike of 35-50 bps, while the other two expected a hike of 25-35 bps and 40-50 bps, respectively.

The market was upbeat that the Reserve Bank of India would signal a pause to policy tightening, after raising rates by 90 bps in the past two policy meetings.

"The market had emptied out of the 50 bps rate hike expectations during the week, and that aggressive positioning got punished today," a dealer at a primary dealership said.

Till Thursday, the yield on the 10-year benchmark 6.54%, 2032 bond had slumped 16 bps this week.

While RBI Governor Shaktikanta Das today said there were signs that inflation had peaked, the central bank retained its forecast for 2022-23 (Apr-Mar) at 6.7%.

Traders hit stop losses as the 10-year benchmark topped 7.23% during the day, dealers said.

Moreover, the governor did not hint at pausing rate hikes despite repeated questions at the post-policy press conference. Instead, the uncertainty on the inflation outlook that RBI officials highlighted spooked market participants, dealers said.

The market soured further after Das said that the currently prevailing negative real interest rates were a matter of concern, and were engaging the Monetary Policy Committee's attention.

The rate hike weighed on the demand for gilts at the 330-bln-rupee weekly gilt auction, which was poorly bid due to uncertainty after the RBI commentary and the unexpected rate hike, dealers said.

The government had offered to sell 40 bln rupees of the 6.69%, 2024 bond, 70 bln rupees of the 7.10%, 2029 bond, 130 bln rupees of the 6.54%, 2032 bond, and 90 bln rupees of the 6.95%, 2061 bond.

Gilt yields jumped in line with the high cutoffs set by the RBI at the auction. The central bank set a cutoff yield of 7.33% on the 10-year bond, against the expectation of a 7.30% cutoff, according to an Informist poll of 10 dealers.

"Immediately after the policy, people had just hit stop losses and were not keen to bid," a dealer at a private bank said. "The outstanding short bets had also come down sharply after aggressive covering over the last few days."

However, investors stepped up purchases later in the day above the key 7.30%-mark after trimming their positions at higher yields during the day, dealers said. 

Gilt yields had opened lower today, aided by an overnight fall in crude oil prices.

Prices of crude oil fell to the lowest level since early February, before Russia's invasion of Ukraine, as concerns over a slowing global economy worried investors.

The demand outlook was clouded due to increasing worries about recession in the US and Europe and a strict zero COVID-19 policy in China.

The Brent crude contract for October delivery fell over 2.5% to $94.12 per barrel on Thursday.

According to data on the central bank's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 488.55 bln rupees compared with 472.30 bln rupees on Thursday.

OUTLOOK

Gilts are not traded on Saturday.

On Monday, prices of government bonds are seen opening steady after the sharp slump today after the Monetary Policy Committee hiked rate by 50 bps.

The 50-bps rate hike may weigh on gilt prices. Moreover, the RBI's comments on the uncertainty over the inflation outlook and the lack of forward guidance push gilt prices lower, dealers said.

Overnight movement in crude oil prices and US Treasury yields may also lend early cues to domestic bonds.

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.25-7.35%.

India Gilts: Remain significantly down ahead of auction result

NEW DELHI--1530 IST--Government bond prices remained significantly lower ahead of the result of the 330-bln-rupee weekly gilt auction after the Monetary Policy Committee hiked the repo rate more than expected today, dealers said.

Traders avoided fresh bets after the sharp fall in prices, anticipating the auction cutoffs set by the Reserve Bank of India to lend further cues to the market, dealers said.

Demand at the auction was seen tepid, but a devolvement was unlikely, as the RBI would not be uncomfortable with investors demanding higher yields after the recent surge in prices, dealers said.

Some traders had also bet on the RBI revising its CPI inflation projections lower. While RBI Governor Shaktikanta Das said inflation had peaked, the central bank retained its CPI inflation forecast for 2022-23 (Apr-Jun) at 6.7%.

"The market is holding at the 7.30% level (on the 10-year yield) until the auction result, which will determine the closing range after bad news throughout the day on both inflation and rate hikes," a dealer at a state-owned bank said.

Gilts plummeted after the RBI's rate-setting panel increased the repo rate by 50 basis points as against expectations of a more moderate 35-bps hike.

They fell further after RBI Governor Das said that the currently prevailing negative real interest rates were a matter of concern, and were engaging the Monetary Policy Committee's attention.

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.15-7.30%. (Aaryan Khanna)

India Gilts: Slump after higher-than-expected 50-bps repo rate hike

NEW DELHI--1050 IST--Prices of government bonds fell today after the Reserve Bank of India's Monetary Policy Committee raised the repo rate by a higher quantum than expected, dealers said.

The rate-setting panel increased the repo rate by 50 basis points as against expectations of a more moderate 35-bps hike.

Traders had also bet on the central bank guiding for a slower pace of rate hikes in the future, but prices tumbled as RBI Governor Shaktikanta Das gave no indication of this in his speech, dealers said.

"The overall policy is hawkish, the RBI remains focused on inflation," a dealer at a primary dealership said. "None of the more benign expectations on the path of future rate hikes panned out."

The yields on bonds maturing under five years surged the highest due to fears of sharper rate hikes, dealers said.

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.15-7.30%. (Aaryan Khanna)

India Gilts: Surge on view RBI rate hike to be modest today

NEW DELHI--0935 IST--Prices of government bonds jumped on view that the Reserve Bank of India's Monetary Policy Committee's repo rate hike today may be modest, dealers said. An overnight fall in crude oil prices and US Treasury yields also supported the rise in prices.

Traders are expecting a repo rate increase of 25-35 bps to match the pre-pandemic level of 5.15%, after Informist exclusively reported on Thursday, citing a banking industry source, that the Monetary Policy Committee may mull over pausing rate hikes after today's policy outcome.

The Monetary Policy Committee won't try to match the actions of some other central banks such as the US Federal Reserve, and may turn data-dependent, according to a source.

"Rate hike view has shifted drastically from a week ago," a dealer at a private bank said. "I think any rate hike between 25-35 bps will not lead to a sharp movement in gilts today."

The yield on the 10-year benchmark US Treasury note fell 5 bps to 2.68% on Thursday as investors weighed US jobless claims data and a recession warning from the Bank of England.

Prices of crude oil fell to the lowest level since early February, before Russia’s invasion of Ukraine as concern about a slowing global economy worried investors.

The demand outlook was clouded due to increasing worries about recession in the US and Europe and a strict zero COVID-19 policy in China.

The Brent crude contract for October delivery fell to $94.12 per barrel on Thursday. 

During, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.09-7.23%. (Shubham Rana)

India Gilts: Seen up as crude falls; all eyes on MPC meet outcome

NEW DELHI – Prices of government bonds are seen opening higher today because of a sharp fall in crude oil prices on Thursday, dealers said.

Traders may also step up gilt purchases after Informist exclusively reported, citing a banking industry source, that the Monetary Policy Committee may mull pausing rate hikes after today's policy outcome.

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.10-7.25%, as against 7.16% on Thursday.

Traders may keep to the sidelines on caution ahead of the policy announcement by Reserve Bank of India Governor Shaktikanta Das at 1000 IST today.

The rate-setting panel is expected to increase the repo rate by 35-50 bps, according to the majority of participants in an Informist poll.

The Monetary Policy Committee won't try to match the actions of some other central banks such as the US Federal Reserve, and may turn data-dependent, according to a source.

Following the report, traders are now expecting a repo rate increase of 25-35 bps to match the pre-pandemic level of 5.15%, dealers said.

Investors may make room for fresh issuance at the 330-bln-rupee weekly gilt auction today, even as bets may not be very aggressive, dealers said.

The government has offered to sell 40 bln rupees of the 6.69%, 2024 bond, 70 bln rupees of the 7.10%, 2029 bond, 130 bln rupees of the 6.54%, 2032 bond, and 90 bln rupees of the 6.95%, 2061 bond.

Prices of crude oil fell to the lowest level since early February, before Russia’s invasion of Ukraine, as concerns over a slowing global economy worried investors.

The demand outlook remains clouded due to increasing worries about recession in the US and Europe and a strict zero COVID-19 policy in China.

The Brent crude contract for October delivery fell to $94.12 per barrel on Thursday. Typically, a fall in crude oil prices decreases the risk of imported inflation in India, reducing pressure on RBI to withdraw monetary policy accommodation. (Shubham Rana)

End

US$1 = 79.23 rupees

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

Edited by Vidhi Verma

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