RBI Keeps a Lid on Yields, for Now

RBI Keeps a Lid on Yields, for Now

• RBI conducts Operation twist, simultaneous sale, and purchases of Government securities
• New 10 year benchmark yield closed at 5.85%, down by 5 bps on a weekly basis
• 5-year OIS yield rose by 5 bps to 4.18% on a weekly basis
• CCIL SDL Index closed at 6.50%, down by 1 bps on a weekly basis
• Liquidity continues to be in surplus at Rs 3.53 trillion

RBI, sensing fatigue in the market for government bonds, conducted an operation twist for total purchase and sale of bonds of Rs 200 billion. 10-year benchmark bond yield fell by 5bps after rising by almost 15bps from lows on the back of the RBI operation twist.
Click here for details of operation twist.

RBI is keen to keep bond yields from rising despite the continuous supply of government bonds and worries of inflation.
Read our report on Bond Market Worries on Inflation for details. The severe economic shock caused by lockdown is forcing the central bank to target long term yields.

Domestic service PMI stood at 33.7 in June 20. As per RBI data, the deposit growth rate remained at 11% while the credit growth rate stood at 6.2%(as on 19th June).

Data from PMIs and bank credit are showing economic contraction and with the downturn in tax collections, the central government and state governments are dependent on market borrowings to fund the fiscal gap. The government announced a further Rs 900 billion package for economically weak sections of the population.

The extension of lockdown in July will further affect the economy and revenues will be hit badly for the governments. Borrowings are likely to rise from current budgeted levels and this can hurt bond yields.

RBI will have to conduct more targeted yield measures and even monetize fiscal deficit to cap yields from rising. However, this cannot be for long term and artificial levels of yields will hurt investors absorbing huge supply.

The new benchmark 10-year bond, the 5.79% 2030 bond, yield came down by 5 bps to 5.85% on a weekly basis. Old benchmark 6.45% 2029, yield remained declined by 4 bps 5.96%. New 5-year benchmark 5.22% 2025 yield decreased by 10 bps to 5.07%. The old benchmark 5-year bond, the 6.18% 2024 bond, yield came down by 9 bps to 4.94% while 7.17% 2028 bond yield decreased by 6 bps to 5.95%. The 6.68% 2031 yield level fell by 2 bps to 6.24% on a weekly basis. Long term paper 7.16% 2050 yield came down by 9 bps to 6.51%.

One-year OIS yield fell 1 bps to 3.64% while the five-year OIS yield decreased by 1 bps to 4.17% on a weekly basis.

System liquidity as measured by bids for Repo, Long Term Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI, drawdown from Standing Facility (MSF or Marginal Standing Facility) and CMB was in surplus of Rs 3534 billion as of 03rd July 2020. Liquidity was in a surplus of Rs 2769 billion as of 26th June 2020.

INR Rallies as RBI Stays Away from Forex Markets

Currency Market Snapshot For The Week

• INR appreciated by 1.34% against the USD last week and appreciated by 1.22% against the euro.
• USD fell by 0.27% on a week on week basis and is at a level of 97.17.
• The British pound appreciated by 1.19% against the USD
• Euro appreciated by 0.26% against the USD.

Global Bond Market Snapshot For The Week

• US 10-year benchmark bond yields rose by 3 bps last week.
• German 10-year bond yield rose by 5 bps and is at negative 0.44%, the French 10-year bond yield rose by 1 bps.
• Italy's 10-year benchmark yield fell by 4 bps to 1.32%.
• US benchmark Junk bond yields fell by 13 bps to 6.56%

INR rallied sharply against USD last week, as it broke out of a tight trading band, boosted by strong inflows and expectations that the central bank may be slowing its purchases of USD. RBI, which has been aggressively buying USD in the last two months, stayed away from the forex market last week, triggering a massive rally in the INR.

India posted a marginal current account surplus in Q4FY20 on the back of lower trade deficit, along with higher remittances and an increase in investment flows. (Read our note on Current Account Balance). However, India's Balance of Payments (BoP) showed that on a fiscal year basis, the current account balance was in deficit. INR appreciated by 1.34% against the USD last week and appreciated by 1.22% against the euro.

USD traded lower against major world currencies last week amid release of upbeat U.S. and European economic data but rising COVID-19 figures globally, and particularly in the U.S., blunted more aggressive risk-taking. USD Index (DXY), which tracks the movement of the USD against six major currencies, fell by 0.27% on a week on week basis and is at a level of 97.17.

The number of global cases topped 10.8 million as of July 3, according to Johns Hopkins university data. However, the market sentiment had an additional boost in the latter part of the week from the news that a COVID-19 vaccine developed by German biotech firm BioNTech and U.S. pharmaceutical giant Pfizer has shown potential and was found to be well tolerated in early-stage human trials.

U.S. manufacturing activity rebounded more than expected in June, with the manufacturing activity index published by the Institute for Supply Management (ISM) hitting its highest in 14 months as firms and businesses resumed operations.

U.S. non-farm payrolls released on Thursday, showed that the economy added 4.8 million jobs in June, higher than the expectation of 3 million and against Mays figure of 2.699 million. The June unemployment rate fell to 11.1% from 13.3% in May.

The euro appreciated by 0.26% against USD last week as market participants cheered the European Central Banks expansion of its bond-purchase program. ECB said on Thursday that it would increase the size of its Pandemic Emergency Purchase Program by euro 600 billion (USD 673 billion) to buy as much as euro 1.35 trillion of eurozone government and corporate debt through June 2021, putting its stimulus effort in league with the Federal Reserves. ECB President Christine Lagarde said members voted unanimously to expand the program.

Weekly Global Bond Market Analysis

US 10-year benchmark bond yields rose by 3 bps last week and is at 0.67%, as minutes from the Federal Reserves meeting in June showed that the central bank discussing the merits of yield curve control.

Eurozone bond yields were largely mixed last week as ECB expands its bond-buying program. German 10-year bond yields rose by 5 bps and are at negative 0.44%, France 10-year bond yields rose by 1 bps and is at negative 0.12%. Italys 10-year benchmark yield fell by 4 bps.

US benchmark Junk bond yield fell by 13 bps and is at 6.56%, Euro benchmark Junk bond yields fell by 8 bps to 4.49%.