Market participants look forward to the US Fed outcome for positive cues

The domestic bond market participants look forward to the outcome of the US Federal Reserve's meet on Wednesday for positive cues. The government bond market remains volatile amid speculations of India's inclusion into bond indices and tight liquidity. 

According to the CME fed watch tool, 98 per cent of investors expect the US Federal Reserve to keep the rates unchanged at 5.25- 5.50 per cent in their next meeting. On the domestic front, the Reserve Bank of India's (RBI) monetary policy committee (MPC) is expected to keep the repo rate unchanged for at least a year from now, dealers said. The repo rate currently stands at 6.50 per cent.

Market participation said that the rumours of bond inclusion were speculative in nature, aligning with previous reports that had consistently failed to deliver positive actions from index providers, thus disappointing the market.

The yield on the benchmark 10-year government bond traded between 7.12 per cent and 7.25 per cent in the previous week. The benchmark yield fell below the psychologically crucial 7.15 per cent mark during the week due to optimism regarding including bonds in the international indices. However, the rise in US Treasury yields and crude oil prices dampened the sentiment.

The yield on the 10-year US Treasury note rose to 4.32 per cent by the end of the Indian market hours on Friday, against 4.26 per cent on Thursday.

"Last week, the market turned positive due to a slight easing of the CPI inflation figures. However, the 10-year government bond closed lower again with the concerns of US treasury yield volatility, increasing Brent crude oil prices, weakening of rupee, El nino monsoon impacts. Investors will now look forward for any positive cues from Fed statement, and RBI monetary policy," Venkatakrishnan Srinivasan, bond market veteran, founder and managing partner of Rockfort Fincap LLP, said.

Meanwhile, the surplus liquidity in the banking system fell to Rs 2,696 crore on Thursday ahead of the second tranche of incremental cash reserve ratio disbursement on September 23.

Market participants believe the liquidity might again fall into deficit if the central bank does not conduct a variable repo rate (VRR) auction.

"There can be deficit liquidity for at least 2-3 days, given the tax outflows," a dealer at a state-owned bank said. "The disbursement of Rs 25,000 crore should help but would not be enough," he added.

Date	yield
11.09.23	7.25
12.09.23	7.23
13.09.23	7.2
14.09.23	7.13
15.09.23	7.2
Source- Bloomberg