The average trading volumes in the government securities have surged by 63%, as traders expect the US Federal Reserve to cut interest rate on Wednesday.
According to dealers, foreign portfolio investors continued to purchase government bonds, believing that an interest rate cut would lead to a decline in US Treasury yields. This would widen the interest rate differential between safe-haven assets and emerging market debt, making domestic government securities more attractive to them.”
The average trade volumes rose to Rs 61,377 crore in last week compared to Rs 37,623 crore in the previous week. On Monday and Tuesday, the trading volumes were Rs 66,551 crore and Rs 58,444 crore respectively.
The US Federal Open Market Committee (FOMC) meeting is being held on September 17 and September 18. The committee would detail its outlook on late Wednesday.
Some state-owned banks also bought the government bonds and kept them under the held for trading portfolio, a sub-category of fair value through profit and loss to cash on quick short-term gains, dealers said.
“The market (G-sec) has been going through palpations. It has moved a lot in last few days because everyone has taken their positions keeping a rate cut in their minds,” a dealer at a private bank said.
This has led to a sharp rise in gilt prices in the latter half of the last week. Usually, traders remain on the sidelines before any crucial event.
After a rate cut by the US, traders will closely observe the trajectory of the future rate cuts in the world’s largest economy, dealers said. In addition to the policy outcome, US Fed officials will detail their summary on interest rates, growth, and inflation going forward.
Along with banks, primary dealers were also active throughout the week as they were anticipating a sharp movement in gilt prices after the FOMC detailed its outlook on Wednesday. According to the CME Fed watch too, Fed funds futures have priced in a 100% chance of a rate cut in September.