Informist, Monday, May 23, 2022

By Aaryan Khanna

NEW DELHI – Government bonds closed on a mixed note today as concerns over India borrowing extra weighed down long-term gilts, while fears of aggressive rate hikes ebbed and spurred gains in bonds of shorter maturities.

The 10-year benchmark 6.54%, 2032 bond settled at 94.22 rupees, or 7.39% yield, as against 94.40 rupees, or 7.36% yield, on Friday.

On Saturday, the Centre unveiled a host of measures, including a sharp cut in excise duty on petrol and diesel, in a bid to tame rising inflation. Implications of those measures led to a divergent view in gilts, dealers said. 

The government would cut excise duty on petrol by 8 rupees per ltr and diesel by 6 rupees per ltr, Finance Minister Nirmala Sitharaman said in a series of tweets on Saturday.

The government also announced reduction in import duty on raw materials used in production of steel and some plastic products and imposition of export duty on some steel products.

"The action is proactive and holistic; as such, inflation could come down significantly, which is why a rethink on rates could be quite necessary," a dealer at a state-owned bank said.

Bonds maturing under five years were in favour after a protracted rise in their yields on the view of sharp rate hikes. Since the off-cycle 40-basis-point repo rate hike on May 4, yield on five-year benchmark 5.74%, 2026 bond had risen 48 bps until Friday.

Traders discarded bets of a 75 bps repo rate hike at the next policy review in June, which was already seen unlikely and would be unnecessary in conjunction with the duty cuts, dealers said.

The 5.74%, 2026 bond's volume spiked along with the rise in price, but gave up some gains as dealers awaited comments from policymakers to gauge the impact of domestic measures, with significant price pressures continuing to emanate from overseas cues.

While the government's measures are likely to rein in inflation and reduce the probability of Monetary Policy Committee embarking on a path of sustained rate hikes, the fiscal strain of the move could prompt the Centre to announce additional market borrowing later in the year, dealers said.

The cut in excise duty on petrol and diesel, the second time in six months, will cost the central exchequer around 1 trln rupees per year, Sitharaman said.

Reports indicated that the Centre would look to borrow the entire amount from the market, leading prices to slump early in the day.

This borrowing would likely be concentrated in gilts maturing above five years, should it be announced, dealers said.

However, Informist exclusively reported, quoting a senior finance ministry official, that it was too early in the year to consider if extra borrowing will be needed to offset the loss in revenue.

Losses were immediately limited and traders covered their short bets after investors stepped up purchases past the 7.40%-yield mark on the 10-year benchmark 6.54%, 2032 gilt, dealers said.

Lower-than-anticipated capital receipts by the government also weighed on gilts, dealers said. Central bank observers had expected Reserve Bank of India's surplus transfer to be 500-600 bln rupees for 2021-22 (Apr-Mar), much higher than the actual transfer of 303.07 bln rupees.

Comments by Reserve Bank of India Governor Shaktikanta Das in an interview with television channel CNBC-TV18 failed to lend significant cues to the market, lacking any fresh forward guidance on either the government's borrowing programme or interest rates to make a large impact, dealers said.

"One of the problems was that Das didn't give enough of a cue on what the market should be concerned about, and because of this people have had this moderate trade-off between a borrowing focus versus the inflation focus," a dealer at a primary dealership said.

The central bank has entered a new phase of coordinated action with the government and the actions taken by both RBI and the government would have a sobering impact on inflation, Das said, adding that the government's steps to check inflation were timely.

According to data on RBI's Negotiated Dealing System – Order Matching platform, the market-wide turnover was 290.10 bln rupees compared with 249.20 bln rupees on Friday.

OUTLOOK

On Tuesday, government bonds may continue to trade on a mixed note in the wake of the government's measures to curb inflation.

Short-term gilts may be buoyed by the view that the Monetary Policy Committee may hike rates less aggressively after the Centre's move.

Meanwhile, the impact on the government's revenue will be eyed as traders remain wary of the Centre announcing additional borrowing to fund its growth-boosting and inflation curbing initiatives, dealers said.

Traders will also keep an eye on any sharp movements in crude oil prices and US Treasury yields for cues.

The yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.35-7.43%.

India Gilts: Long-term bonds dn; RBI Das comments on expected lines

NEW DELHI--1335 IST--Government bonds traded on a mixed note, with long-term bonds staying down as Reserve Bank of India Governor Shaktikanta Das' comments in an interview were thought to be on expected lines, dealers said.

Among other things, Das spoke on inflation, rate hikes, the Centre's fiscal situation, and the borrowing programme. However, most things he said were generic and known, dealers said.

"The comment on government meeting fisc aim, and lack of any alarm bells on inflation, are the only silver linings here. On the whole, it was like a check-in with the market and the public and quite generic," a dealer at a primary dealership said.

Das said the Centre's revenue figures looked very robust, and his sense was that the government would maintain the fiscal deficit target for 2022-23 (Apr-Mar). He added that the RBI would remain committed to ensure non-disruptive government borrowing.

Meanwhile, short-term bonds remained up, taking some comfort from the governor's comments on inflation, dealers said.

The RBI has entered a new phase of coordinated action with the government and the actions taken by both the central bank and the government would have a sobering impact on inflation, Das said, adding that the government's steps to check inflation were timely.

Long-term bonds fell earlier due to worries that the Centre would have to borrow more to offset the revenue loss from excise duty cuts in petrol and diesel.

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.34-7.42%. (Shubham Rana)

India Gilts: Short-term bonds up on hopes of less severe rate hikes

NEW DELHI--1155 IST--Short-term government bonds were up on expectations that interest rate hikes will be less aggressive in the upcoming policy meetings, dealers said. The expectations are on account of the Centre announcing a host of measures to bring down inflation, including a sharp cut in the excise duty on petrol and diesel.

Finance Minister Nirmala Sitharaman said on Saturday that the government will cut excise duty on petrol by 8 rupees per ltr and diesel by 6 rupees per ltr.

Further, the duty on the import of raw materials used in the plastic industry and for steel production has been reduced. The government has also imposed a 15% export duty on some steel products.

The move comes at a time when India's annual inflation rate based on CPI rose to a near eight-year high of 7.79% in April.

"We are committed to ensure that the prices of essential items are kept under control," Sitharaman said, urging the states to similarly cut tax on petrol and diesel.

"Now that the entire inflation trajectory has moved down by around 50 bps for the next few months, people are canning the assumptions they had made around aggressive rate hikes being almost certain. More clarity will come only when the central bank or MPC (Monetary Policy Committee) members will speak on the short-term outlook, so the governor's speech is going to be important today," a dealer at a private bank said.

Earlier, the market was expecting the Reserve Bank of India's rate-setting panel to increase the repo rate sharply in both the June and August policy meetings to bring down the rise in prices.

According to an Informist poll, as of May 19, economists and treasury officials expected the rate-setting panel to hike the repo rate by around 50 basis points in the Jun 6-8 policy meeting. By August, they expected it to be hiked to 5.15%. 

Now, traders await comments by RBI Governor Shaktikanta Das in a media interview today for cues on the central bank's stance on controlling inflation.

During the day, the yield on the 5-year benchmark 5.74%, 2026 bond is seen at 7.02-7.09%. (Shubham Rana)

India Gilts: Mixed; long term bonds fall on fear of extra borrow

NEW DELHI--0955 IST--Government bonds traded on a mixed note with the long-term papers falling due to fear that the Centre may look to borrow the entire amount it will forego as revenue due to the petrol and diesel excise duty cut, dealers said.

However, longer dated bonds recovered some losses after Informist reported quoting a senior finance ministry official that it was too early to mull over an extra borrowing to offset the revenue loss from the fuel excise duty cut, dealers said.

While the long-term bonds fell slightly, the short-term bonds rose on expectation that the Reserve Bank of India's rate setting panel may not hike interest rates as sharply as anticipated a few days ago, after the Centre took steps to bring down inflation.

On Saturday, the Centre announced a host of measures to control the rising inflation, including a sharp cut in excise duty on petrol and diesel. 

The Centre's move comes in the backdrop of India's annual inflation rate based on CPI rising to a near eight-year high of 7.79% in April.

The cut in excise duty on petrol and diesel, the second time in six months, will cost the central exchequer around 1 trln rupees per year, Finance Minister Nirmala Sitharaman said on Saturday. The central government will bear the entire brunt of the 1-trln-rupee reduction in duty on petrol and diesel announced on Saturday as the cut has been made in cess and not on basic excise duty, Sitharaman clarified on Sunday.

The official said that the government could make up for the reduction in excise collections through other sources of revenue, or by lowering its expenditure, rather than straightaway resorting to additional market borrowing.

"One of the options is to tweak the expenses that the government has planned for the entire year," the official said. "The other option is to look at other revenues sources like disinvestment and robust goods and services tax collections."

The market will keep an eye on RBI Governor Shaktikanta Das' interview with the media at 1200 IST today.

"The expectation was that yield would go up today because that is the eventual direction for the yields. States have also started borrowing now, which is another negative for the market," a dealer at a state-owned bank said.

"Market will closely see what the (RBI) Governor has to say today, if he extends support to the government's measures, then the market may rise."

During the day, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.33-7.41%. (Shubham Rana)

India Gilts:Seen down on worry excise cut may lead to fiscal slippage

NEW DELHI – Government bonds are seen sharply lower today on worry that the excise duty cut and increase in fertiliser subsidy by the Centre could lead to fiscal slippage and in turn, extra borrowing from the market, dealers said.

On Saturday, the Centre announced a host of measures to try and control the rising inflation, including a sharp cut in excise duty on petrol and diesel.

The government will cut excise duty on petrol by 8 rupees per ltr and diesel by 6 rupees per ltr, Finance Minister Nirmala Sitharaman said in a series of tweets.

The cut in excise duty on petrol and diesel, the second time in six months, will cost the central exchequer around 1 trln rupees per year, she said. The central government will bear the entire brunt of the 1-trln-rupee reduction in duty on petrol and diesel announced on Saturday as the cut has been made in cess and not on basic excise duty, Sitharaman said on Sunday.

The Centre's move comes in the backdrop of India's annual inflation rate based on CPI rising to a near eight-year high of 7.79% in April.

The measures announced are likely to severely strain the central government finances. The excise duty cut on petrol and diesel and subsidy on cooking alone will cost the government exchequer 1.06 trln rupees.

The Budget has projected the central government's fiscal deficit in 2022-23 (Apr-Mar) at 16.61 trln rupees or 6.4% of the GDP.

However, with the steps taken by the Centre to control the surging inflation, the market is of the view that the Reserve Bank of India's Monetary Policy Committee may not hike rates aggressively in the upcoming policy meeting in June and then in August, dealers said.

Traders expect a substantial decline in the 1-year overnight indexed swap rate since a 75 basis points rate hike in June is now seen off the table, dealers said.

However, the 5-year OIS may not see the same fall as the 1-year swap because traders may pay higher fixed rates in order to protect their underlying gilt holdings with the bond yields expected to rise sharply today.

Globally, the yield on the benchmark 10-year US Treasury note fell 6 bps to 2.78% on Friday, as investors flocked to safe-haven assets and sold off stocks. The fall in US Treasury yields may support domestic bonds today.

The market will keep an eye on RBI Governor Shaktikanta Das' interview with the media at 1200 IST today.

Today, the yield on the 10-year benchmark 6.54%, 2032 bond is seen at 7.34-7.45%, as against 7.36% on Friday.  (Shubham Rana)

End

US$1 = 77.52 rupees

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

Edited by Deepshikha Bhardwaj

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