India’s short-term bonds rally on hopes of record RBI dividend

India’s short-term bonds rally on hopes of record RBI dividend.

Shorter-tenor Indian bonds are leading a rally, with the government borrowing costs dropping to a three-year low at a bill auction on expectations of a bumper dividend payout from the central bank later this week.

The yield on five-year benchmark debt fell as much as five basis points to 5.85%. The cutoff yield for the shortest 91-day paper at the treasury bill sale came in at 5.7124%, the lowest since Sept. 2022, beating expectations of 5.74% in a Bloomberg survey. The 182- and 364-day bill cutoffs were also lower than expected.

Banking liquidity has swung to a surplus of 2 trillion rupees from a deficit of as much as 3.3 trillion rupees earlier in the year, driven by the Reserve Bank of India’s debt purchases that have exceeded its Covid-era levels. A record dividend payout to the government is expected to further amplify this surplus. The RBI board will meet on Friday to consider the dividend, Bloomberg News reported earlier this week.

Kotak Mahindra Bank Ltd. estimates the monetary authority to transfer as much as 3.5 trillion rupees ($41.4 billion) to the government, while IDFC First Bank Ltd. forecasts the dividend to be about 3 trillion rupees for the fiscal year that ends in March. The RBI paid out 2.1 trillion rupees in the previous year.

“Expectations of liquidity increasing in the system post RBI’s dividend payout and hopes of a deeper rate cutting cycle,” are helping shorter bond outperform, said Puneet Pal, head of fixed income at PGIM Asset Management Ltd.

The central bank is expected to cut its rate again in the June policy for a third straight time this year, as easing inflation helps it support growth

Shorter-dated papers have outperformed longer notes in recent weeks, likely due to expectations of a large dividend payout likely leading the RBI to cut down on its open market bond purchases. That could hurt demand for longer papers. As a result, the five-year yield has dropped over 20 basis points this month, compared to a 12 basis point drop in the benchmark 10-year paper.