Informist, Thursday, Aug 8, 2024
By Aaryan Khanna
MUMBAI – The government bond market's takeaway from the August monetary policy review was that the Reserve Bank of India wanted to keep financial market conditions the exact same as the previous day. And if you were a gilt trader on Wednesday, things were good.
Demand for bonds from foreign and domestic investors has been robust and liquidity in the banking system was near 2 trln rupees. The Monetary Policy Committee maintained that equilibrium, by keeping the policy repo rate at 6.50% and the "withdrawal of accommodation" stance with a 4:2 vote, the same as that in June.
More importantly, RBI played a part by not announcing fresh measures that would impact the bond market. This was seen as a tacit understanding that it was comfortable with both money market rates and yields on dated securities having fallen 15 basis points each over the last two months, dealers said. The 10-year gilt yield ended 2 bps higher today at 6.88%, perturbed more by the bond auction on Friday than the event and commentary today.
"Today was an actual status quo on policy, even though there were some different expectations coming in," Pankaj Pathak, fund manager - fixed income at Quantum Asset Management Co, said. "But monetary policy is just one part of what is happening in the bond market. The overall environment is still very favourable for bonds."
A big boost to market sentiment was that the RBI avoided even speaking about the mammoth liquidity surplus that has built up in the banking system, which had peaked at a 25-month high of 2.78 trln rupees last week. Traders had dreaded the central bank would look to wipe this out through open market sales of bonds through auctions in its pursuit of the MPC's "withdrawal of accommodation" stance. But RBI Deputy Governor Michael Patra, speaking at the post-policy press conference, said that this was where call money rates and liquidity were ordinarily supposed to be. For the central bank, this was still withdrawal of accommodation, he said.
This was enough for some to read that the excess cash was here to stay. And the lower cost of funding, more consistently near the repo rate, would keep bonds well-bid at the auction and in the secondary market from traders who use leverage for their bond purchases. Life insurers and pension funds have already been mopping up long-term bonds to match the double-digit growth in their liabilities, dealers said.
On the other hand, some traders were disappointed that the MPC did not change its stance to "neutral" as they had expected. The certainty of a stance change would signal a more consistent anchoring of money market rates, if the current liquidity surplus fades away due to the RBI's operations over the next several months.
"Lack of any specific mention of OMO (open market operations) sales in the (RBI) governor's statement was at the margin comforting, even as we expect any excess liquidity to be gradually sterilised so that the overnight rate settings are aligned closer to the repo rate," Rajeev Radhakrishnan, chief investment officer - fixed income, SBI Mutual Fund, said.
STEEPENER STILL FAVOURED
In this swansong, the one discordant note has been the RBI's open market operations sales of government bonds in the secondary market. Between Jul 8 and Jul 26, the central bank sold a net 101.05 bln rupees worth of gilts. The RBI has not been shy in saying the tool is part of its kit to drain liquidity, but did not address the sales at all in the policy statement or in the post-policy press conference. The pace of these sales is only likely to go up, likely matching the intensity of gilt purchases by foreign portfolio investors, dealers said. India's bonds are being included in emerging market local currency indices operated by JP Morgan and Bloomberg Index Services over the next 14 months.
Despite the sales by the RBI, which are most likely in bonds maturing under seven years, short-term gilt yields are expected to fall more than those of longer tenures. This would effectively "steepen" the gilt yield curve. For some, this view is based purely on increased liquidity. For others, the supply-demand mismatch in short-term bonds was too good to give up, even if they were more circumspect that rate cuts were coming – a boon for the shorter-tenure instruments, which are typically more sensitive to rate movements.
Pathak has recently shifted some of his portfolio to gilts in the "belly of the curve" from 30- and 40-year bonds. Bonds maturing in 5-10 years have also been boosted by "artificial" demand from the RBI's recent curb on foreign portfolio investment in new 14- and 30-year bonds. The FPIs, which had already favoured gilts maturing under 10 years, now have little choice but to pile onto the segment as weights on JP Morgan's emerging market index increase and India's bonds need to be more closely tracked.
The RBI's draft guidelines on liquidity coverage ratio norms are also seen driving up demand for high-quality assets such as government bonds, dealers said. Bonds maturing between December 2025 and March 2028 will be preferred by banks, as these will correspond to the up-to-three-year maturity after the proposed norms come into effect from Apr 1.
"It's difficult for the 10-year yield to break below 6.80% if there is no rate cut," said Alok Singh, head of treasury at CSB Bank. "If liquidity conditions persist in such a surplus, the 2-,3- and 5-year bonds could fall 10 basis points more than that, before the entire curve falls in tandem."
That floor for the 10-year benchmark yield is widely acknowledged by many. The 10-year bond may not have enough juice to fall further with many of the positives already priced in, and no further hat-tip by policymakers today about whether they were ready to ease policy conditions. The benchmark yield is now seen between 6.80-7.00% in the two months to the next policy review.
DRUMMING UP THE RATE CUT
The more one talks to Indian government bond investors, both those buying from leverage and those investing their own cash, the one thing that jumps out even after the policy is a favourable risk-reward in holding bonds. This is despite the RBI's strident tone on aligning inflation to its 4% medium-term target today.
RBI Governor Shakikanta Das had been clear inflation was the elephant in the proverbial room over the last few rate decisions. CPI inflaton in June climbed to a four-month high of 5.08%. The central bank retained its GDP growth forecast at 7.2% for 2024-25 (Apr-Mar) and its CPI inflation forecast of 4.5% as well.
More concerning for those hoping for a quick rate cut were the projections for Apr-Jun 2025. GDP growth was seen at 7.2% for the year, while CPI inflation was estimated at 4.4%, still above the RBI's aim and neither making the case for an imminent rate cut in India.
Even so, bond traders looked abroad and said the global linkages tracked by the Indian market were positive. Signs of the US economy weakening have propelled bets that the US Federal Reserve would pursue an aggressive cycle of rate cuts starting in September. Even if India's bond yields don't fall sharply, the volatility in US yields in the coming months based on each subsequent data point is likely to provide traders with enough opportunity to make money, dealers said.
Investors also don't see too much of an upside in yields, and have been ever-ready to invest more cash to lock in current levels of returns. While Das dismissed concerns of a US recession today, traders were confident that a growth slowdown was coming, and that it would also prompt the MPC to cut rates sooner rather than later no matter its reluctance. India's one-year overnight indexed swap rate, a measure for near-term interest rate expectations, rose today but still showed that traders expected a rate cut in India by December.
"Now that the bi-monthly monetary policy is out of the way, it is hoped that the market will focus on demand and supply, and global developments," V.R.C Reddy, head of treasury at Karur Vysya Bank, said. "In the aftermath of the policy, we can expect the policy pivot will likely start with a changing stance from October and a shallow rate cut by the end of this calendar year. End
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© Informist Media Pvt. Ltd. 2024. All rights reserved.
Informist, Thursday, Aug 8, 2024
By Aaryan Khanna
MUMBAI – The government bond market's takeaway from the August monetary policy review was that the Reserve Bank of India wanted to keep financial market conditions the exact same as the previous day. And if you were a gilt trader on Wednesday, things were good.
Demand for bonds from foreign and domestic investors has been robust and liquidity in the banking system was near 2 trln rupees. The Monetary Policy Committee maintained that equilibrium, by keeping the policy repo rate at 6.50% and the "withdrawal of accommodation" stance with a 4:2 vote, the same as that in June.
More importantly, RBI played a part by not announcing fresh measures that would impact the bond market. This was seen as a tacit understanding that it was comfortable with both money market rates and yields on dated securities having fallen 15 basis points each over the last two months, dealers said. The 10-year gilt yield ended 2 bps higher today at 6.88%, perturbed more by the bond auction on Friday than the event and commentary today.
"Today was an actual status quo on policy, even though there were some different expectations coming in," Pankaj Pathak, fund manager - fixed income at Quantum Asset Management Co, said. "But monetary policy is just one part of what is happening in the bond market. The overall environment is still very favourable for bonds."
A big boost to market sentiment was that the RBI avoided even speaking about the mammoth liquidity surplus that has built up in the banking system, which had peaked at a 25-month high of 2.78 trln rupees last week. Traders had dreaded the central bank would look to wipe this out through open market sales of bonds through auctions in its pursuit of the MPC's "withdrawal of accommodation" stance. But RBI Deputy Governor Michael Patra, speaking at the post-policy press conference, said that this was where call money rates and liquidity were ordinarily supposed to be. For the central bank, this was still withdrawal of accommodation, he said.
This was enough for some to read that the excess cash was here to stay. And the lower cost of funding, more consistently near the repo rate, would keep bonds well-bid at the auction and in the secondary market from traders who use leverage for their bond purchases. Life insurers and pension funds have already been mopping up long-term bonds to match the double-digit growth in their liabilities, dealers said.
On the other hand, some traders were disappointed that the MPC did not change its stance to "neutral" as they had expected. The certainty of a stance change would signal a more consistent anchoring of money market rates, if the current liquidity surplus fades away due to the RBI's operations over the next several months.
"Lack of any specific mention of OMO (open market operations) sales in the (RBI) governor's statement was at the margin comforting, even as we expect any excess liquidity to be gradually sterilised so that the overnight rate settings are aligned closer to the repo rate," Rajeev Radhakrishnan, chief investment officer - fixed income, SBI Mutual Fund, said.
STEEPENER STILL FAVOURED
In this swansong, the one discordant note has been the RBI's open market operations sales of government bonds in the secondary market. Between Jul 8 and Jul 26, the central bank sold a net 101.05 bln rupees worth of gilts. The RBI has not been shy in saying the tool is part of its kit to drain liquidity, but did not address the sales at all in the policy statement or in the post-policy press conference. The pace of these sales is only likely to go up, likely matching the intensity of gilt purchases by foreign portfolio investors, dealers said. India's bonds are being included in emerging market local currency indices operated by JP Morgan and Bloomberg Index Services over the next 14 months.
Despite the sales by the RBI, which are most likely in bonds maturing under seven years, short-term gilt yields are expected to fall more than those of longer tenures. This would effectively "steepen" the gilt yield curve. For some, this view is based purely on increased liquidity. For others, the supply-demand mismatch in short-term bonds was too good to give up, even if they were more circumspect that rate cuts were coming – a boon for the shorter-tenure instruments, which are typically more sensitive to rate movements.
Pathak has recently shifted some of his portfolio to gilts in the "belly of the curve" from 30- and 40-year bonds. Bonds maturing in 5-10 years have also been boosted by "artificial" demand from the RBI's recent curb on foreign portfolio investment in new 14- and 30-year bonds. The FPIs, which had already favoured gilts maturing under 10 years, now have little choice but to pile onto the segment as weights on JP Morgan's emerging market index increase and India's bonds need to be more closely tracked.
The RBI's draft guidelines on liquidity coverage ratio norms are also seen driving up demand for high-quality assets such as government bonds, dealers said. Bonds maturing between December 2025 and March 2028 will be preferred by banks, as these will correspond to the up-to-three-year maturity after the proposed norms come into effect from Apr 1.
"It's difficult for the 10-year yield to break below 6.80% if there is no rate cut," said Alok Singh, head of treasury at CSB Bank. "If liquidity conditions persist in such a surplus, the 2-,3- and 5-year bonds could fall 10 basis points more than that, before the entire curve falls in tandem."
That floor for the 10-year benchmark yield is widely acknowledged by many. The 10-year bond may not have enough juice to fall further with many of the positives already priced in, and no further hat-tip by policymakers today about whether they were ready to ease policy conditions. The benchmark yield is now seen between 6.80-7.00% in the two months to the next policy review.
DRUMMING UP THE RATE CUT
The more one talks to Indian government bond investors, both those buying from leverage and those investing their own cash, the one thing that jumps out even after the policy is a favourable risk-reward in holding bonds. This is despite the RBI's strident tone on aligning inflation to its 4% medium-term target today.
RBI Governor Shakikanta Das had been clear inflation was the elephant in the proverbial room over the last few rate decisions. CPI inflaton in June climbed to a four-month high of 5.08%. The central bank retained its GDP growth forecast at 7.2% for 2024-25 (Apr-Mar) and its CPI inflation forecast of 4.5% as well.
More concerning for those hoping for a quick rate cut were the projections for Apr-Jun 2025. GDP growth was seen at 7.2% for the year, while CPI inflation was estimated at 4.4%, still above the RBI's aim and neither making the case for an imminent rate cut in India.
Even so, bond traders looked abroad and said the global linkages tracked by the Indian market were positive. Signs of the US economy weakening have propelled bets that the US Federal Reserve would pursue an aggressive cycle of rate cuts starting in September. Even if India's bond yields don't fall sharply, the volatility in US yields in the coming months based on each subsequent data point is likely to provide traders with enough opportunity to make money, dealers said.
Investors also don't see too much of an upside in yields, and have been ever-ready to invest more cash to lock in current levels of returns. While Das dismissed concerns of a US recession today, traders were confident that a growth slowdown was coming, and that it would also prompt the MPC to cut rates sooner rather than later no matter its reluctance. India's one-year overnight indexed swap rate, a measure for near-term interest rate expectations, rose today but still showed that traders expected a rate cut in India by December.
"Now that the bi-monthly monetary policy is out of the way, it is hoped that the market will focus on demand and supply, and global developments," V.R.C Reddy, head of treasury at Karur Vysya Bank, said. "In the aftermath of the policy, we can expect the policy pivot will likely start with a changing stance from October and a shallow rate cut by the end of this calendar year. End
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Send comments to feedback@informistmedia.com
© Informist Media Pvt. Ltd. 2024. All rights reserved.