Traders in India pin hopes on RBI bond purchases to drive gains

Bond traders in India are positioning for the central bank to resume buying government debt in the coming months, a decision they say will spur gains as the current easing cycle approaches its end. The Reserve Bank of India may acquire about Rs 2 lakh crore ($22.4 billion) of bonds next quarter, according to Bandhan AMC Ltd. DSP Asset Managers Pvt. expects Rs 3 lakh crore of debt buying by May, helping pull down 10-year yields by around 25 basis points. A resumption of RBI bond purchases would help offset a looming cash squeeze due to the central bank’s currency-support operations and seasonal liquidity strains during the harvest months. Such a policy would also cap a rise in market interest rates and cushion an economy contending with punitive US tariffs. The central bank is expected to lower its benchmark rate by 25 basis points on Friday, before holding steady in the subsequent quarters, according to a Bloomberg survey of economists. Stronger-than-expected economic growth last quarter has further tempered hopes for deeper easing, strengthening the case for bond purchases instead. The RBI has little need to cut rates, with low inflation and strong growth creating a “Goldilocks” environment, said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank Ltd. However, the RBI may still buy bonds — a move that may support the market, he said. Stronger growth data released on Friday erased the week’s gains in bonds, even as RBI Governor Sanjay Malhotra earlier signaled room for a rate cut. With the easing cycle nearing its end, market attention has now shifted to the central bank’s guidance on liquidity. The yield on the benchmark 10-year bond rose four basis points to 6.51% on Friday and has risen more than 20 basis points from this year’s low reached in May. Persistent foreign-exchange intervention has drained cash and “has cemented expectations that bond purchases might be in the pipeline in December to rein in yields,” said Radhika Rao, senior economist at DBS Bank Ltd. in Singapore. Bond buying could push 10-year yields lower by 20-to-30 basis points in the coming months, she said. The RBI injected Rs 5.2 lakh crore into the banking system via debt purchases through May to bolster liquidity. The central bank has already started buying bonds in the secondary market, acquiring about Rs 27,300 crore notes in two weeks to November 14. A potential trade deal with the US, however, may strengthen demand for Indian assets and attract foreign inflows, reducing the need for large-scale liquidity injections. For now, traders expect the RBI to resume auction purchases soon, a move that may ease yields at the long end of the curve, where demand from insurers and pension funds has softened. Yields on 30-year bonds have risen over 20 basis points since mid-October, while the 10-year yield advanced by two basis points. The spread between long-tenor bonds and the 10-year is likely to stay elevated without RBI buying, said Murthy Nagarajan, head of fixed income at Tata Asset Management Pvt.