No longer shaken, bond market gets licence to chill

Increasing conviction that the Reserve Bank of India (RBI) is unlikely to raise interest rates further has provided the bond market with visibility on future declines in bond yields, thereby prompting greater trading interest this month, treasury executives said.

“We believe that the RBI is done with rate hikes for now. If it did not hike the repo rate in the April meeting, when the inflation prints were higher than 6%, we doubt it will hike when inflation falls below 6%,” HSBC economists Pranjul Bhandari and Aayushi Chaudhary wrote in a report.

Trades Worth ₹4.52 Lakh Crore
“Having said that, we will be watchful of the rupee. It has been remarkably stable in 2023 so far, but another bout of volatility could make the RBI change its mind.” they said in the report.

On April 6, the RBI unexpectedly refrained from raising rates, saying among other things that it wished to assess the impact of rate increases implemented since May 2022. While it has repeatedly maintained that the ‘pause’ applied to that specific policy review, traders believe lower inflation prints, on a favourable statistical base, will allow the central bank to go easy on the policy rate trajectory.

Data released by the Clearing Corporation of India show that outright trades in government bonds received by the clearing house in the first fortnight of April were at Rs 4.52 lakh crore. This is the highest for any fortnight since August 1-August 17, when the trades were at Rs 4.70 lakh crore. More days were taken into account in August as the month witnessed consecutive trading holidays for Independence Day and the Parsi New Year.

Bullish Volumes
Volumes so far this month are 50% higher than those that existed during the same time in March and 38% higher than they were in April 2022. Moreover, over the past eight months, only three witnessed volumes exceeding Rs 4 lakh crore in the first fortnight – August, September and February.

Unsurprisingly, August and September were months that saw steep declines in bond yields driven by many factors including expectations of a softer approach to interest rates in the US.