India’s bond market saw no trading in the first 20 minutes on Tuesday, and the total trading volume as of 11:30 am was just Rs 250 crore, as bond traders worked from home amid expectations of an imminent rate cut.
The market now expects rate cuts of at least 50 basis points, and industry associations have called for a cut of as much as 150 basis points, as the number of coronavirus cases are rising in India and globally, bringing economic activities to a halt.
Some expect India’s gross domestic product (GDP) growth to fall to 3.5 per cent this financial year because of an ongoing slowdown.
According to the CCIL data, 15 trades have been done for the most-traded benchmark 9-year bond for a total volume of only Rs 85 crore. The highest volume, Rs 100 crore, has been garnered in 15 trades for a bond maturing in 2022.
Bond dealers say the fall in volume is because of various reasons. A treasury head explained that traders were working from home, which meant they were just doing bare minimum trades to cover their positions. This would entail buying or selling bonds to maintain the statutory liquidity ratio (SLR), covering call money obligations, etc. While trading from home, one cannot take calls even as trading can be done through web-based platforms. A bank treasury has a front office, mid-office and back office. None of those are working efficiently and, as such, nobody wants to pile up work. Trading-related activities have to be settled on the same day with regulators.
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“The rate cut expectation is also playing a big part. If we are sure that there is a deep rate cut coming, nobody would want to sell their bonds,” said the treasury head.
As rates are cut, the bond yields will dip. And therefore, the prices of bonds will rise. Selling a bond before a rate cut would mean forgoing treasury profits.
Similarly, trading volume in currency has also fallen to less than a third as traders cover only the essential parts to meet clients’ hedging needs.
At 11:35 am, the bond maturing in 2029 was trading at 6.33 per cent, and the rupee was trading at 76.16 per cent.