Traded volumes in bonds soared to an all-time high of Rs76,208 crore on Thursday on consensus that a downward cycle in interest rate has begun.
That compares with average daily volume of Rs20,000 crore in December.
Bets are so one-sided, volumes in government securities are up six times in the last two weeks, smacking down yields from 8.15% to 7.97%.
The Reserve Bank of India (RBI) is expected to cut the repo rate (at which it lends to banks) by at least 25 basis points from 8% in the monetary policy review on January 29.
“The comfort in the bond market has increased and players are anticipating a rate cut in January, that’s why the buoyancy,” said Parthasarathi Mukherjee, president, treasury and international banking at Axis Bank.
Trading is expected to stay heavy in the coming days.
“I don’t think volumes will come down even after the monetary policy because we are in the interest rate downward cycle. The upcoming rate cut is not going to be last — it will be the first,” said N S Venkatesh, head of treasury at IDBI Bank. He sees yields around 7.85-7.9% level as the monetary policy draws closer and forecasts 100 basis points of rate cuts in 2013, which will keep bond market volumes up and yields down.
Sentiment has also been aided by an absence of auctions and sparse open market operations (OMO) by the RBI of late.
“Every auction takes away liquidity and provides more supply of the bonds. So the absence of an auction certainly helps, and the comfort with liquidity improves,” said Mukh-erjee. “OMOs have a twin impact: they infuse liquidity and drain out bonds.”
The finance ministry, which postponed borrowing plans to February 22 from January 4, also boosted sentiment by deferring scheduled auctions.
“This means they are sitting on surplus of cash and don’t need to borrow. It sends a very positive vibe to Bond St, they know there’ll be no fresh supplies,” Venkatesh said.