Indian government bonds experienced an early downturn today as traders engaged in profit-booking, sidelining bond bulls despite the recent dovish minutes from the central bank's latest meeting.
The yield on the benchmark 10-year note was at 6.4921% as of 10:00 a.m. IST, after closing at 6.4799% on Wednesday. Bond yields move inversely to prices. Market participants were anticipating the benchmark yield to hit a key technical level of 6.47% in Thursday's trade.
According to a trader with a primary dealership, the profit booking came as a surprise, especially considering the dovish minutes that further strengthened bets of a rate cut in December. The minutes from the October meeting revealed that members of India's interest-rate panel acknowledged the potential for future rate cuts due to the country's easing inflation outlook.
Reserve Bank of India Governor Sanjay Malhotra noted in the minutes that the benign outlook for headline and core inflation, resulting from the downward revision of projections, opens up policy space to further support growth.
The market is increasingly speculating about a potential rate cut in December, particularly with inflationary pressures showing signs of easing. Most market participants now expect the RBI to cut rates in December.
On Wednesday, Indian government bonds ended largely unchanged as traders booked profits, with the 10-year benchmark yield struggling to slip below the key 6.49% level throughout the session. The yield on the 10-year benchmark note came off intraday highs to end at 6.5030%, after Tuesday's 6.5101% close. A break below 6.49% level could open room for further declines. Bond market bulls drove the early part of the trading session, but the 10-year bond yield was unable to break below 6.49%.
Overall sentiment remains positive due to reduced debt supply from state and central governments, as well as the Reserve Bank of India's dovish stance. Puneet Pal, head of fixed income at PGIM India Mutual Fund, stated that bond valuations have become attractive after the recent increase in bond yields, especially at the longer end of the curve. Pal anticipates rangebound movement in yields and expects the state debt yield curve to outperform over the medium term. State governments have announced plans to raise 2.82 trillion rupees ($31.77 billion) through bond sales in the October-December quarter, which is lower than the previously expected 3.25 trillion rupees.
India's overnight index swaps (OIS) ended lower, led by the longer end of the curve, as traders priced in further rate cuts. The one-year OIS rate ended at 5.41%, while the two-year rate closed 2 bps lower at 5.3450% and the five-year rate also settled 2 bps lower at 5.6150%.
Earlier in September, Indian government bonds fell as traders booked profits after the previous week's rally, which had been triggered by easing fiscal concerns. The yield on the 10-year benchmark bond settled at 6.4942%, compared with the previous close of 6.4651%. The market had been closed on Monday. Last week, bond market appetite revived after a smaller-than-expected revenue loss from the government's consumption tax cuts, and remarks from Finance Minister Nirmala Sitharaman assuaged fears of fiscal slippage and heavier debt supply. Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, noted resistance near the 6.43%-6.44% levels on the 10-year bond yield, after which some profit booking occurred.
