RBI will have to dig deep to keep Financial System Stable

RBI will have to dig deep to keep Financial System Stable

Bond Market Snapshot For The Week

• 10-year benchmark yield closed at 5.82%, up by 2 bps on a weekly basis
• 10-year benchmark yield closed at 5.82%, up by 2 bps on a weekly basis
• 10-year benchmark yield closed at 5.82%, up by 2 bps on a weekly basis
• 5-year OIS yield rose by 1 bps to 4.24% on a weekly basis
• CCIL SDL Index closed at 6.35%, down by 1 bps on a weekly basis
• Liquidity continues to be in surplus at Rs 2.16 trillion

The COVID 19 lockdown continued in July across states, placing a question mark on the resumption of business activity in the country. The first few results for the 1st quarter of FY 21 does not look promising with major industry players in the infrastructure, automobile, and other industrial sectors reporting degrowth in the quarter with no optimism on guidance. Agri and to some extent pharma and FMCG sectors have shown traction while the IT sector has shown some sort of stability but no promising outlook on growth. Read our results tracker for details.

Lenders are indicating that provisions and bad debts will rise once the moratorium ends in August and that credit profiles of borrowers including retail are weakening given job losses, pay cuts, and no prospects for new jobs. Small businesses have been the worst hit and this sector will contribute to a major chunk of bad loans.

Central and state government revenues are taking a huge hit on the weak economy and their dependence on market borrowing will increase. Given all these factors, RBI will have their hands full when it comes to their policy review in August.

RBI will have to address the bad loan impact on lenders, look to provide relief to borrowers, and also support government borrowing. OMO purchase auctions can be expected to cushion bond supply impact on markets and this will keep yields steady across the government bond curve.

RBI will also have to address the stability of weaker lenders and make sure that it does not have a market-wide impact. It remains to be seen how RBI will go about keeping stability in the financial system.

The new benchmark 10-year bond, the 5.79% 2030 bond, yield rose by 2 bps to 5.82% on a weekly basis. 6.45% 2029 bond yield increased by 1 bps to 5.90%. New 5-year benchmark 5.22% 2025 yield increased by 6 bps to 4.94%. The old benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 3 bps to 4.85% while 7.17% 2028 bond yield increased by 1 bps to 5.82%. 6.68% 2031 and 6.19% 2034 yield level remained unchanged at 6.1% and 6.15% respectively from the previous week. On the other hand long term paper 7.16% 2050 yield came down by 8 bps to 6.4% on a weekly basis.

One-year OIS yield rose by 1 bps to 3.72% while the five-year OIS yield increased by 1 bps to 4.24% 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 2155 billion as of 24th July 2020. Liquidity was in a surplus of Rs 2708 billion as of 17th July 2020.

USD Weakens after EU Agrees on Stimulus Package

Currency Market Snapshot For The Week

• INR appreciated by 0.26% against the USD last week and depreciated by 1.55% against the euro.
• USD fell by 1.75% on a week on week basis and is at a level of 94.94.
• The British pound appreciated by 1.80% against the USD
• Euro appreciated by 2.0% against the USD.

Global Bond Market Snapshot For The Week

• US 10-year benchmark bond yield fell by 4 bps and closed at 0.62% last week.
• German 10-year bond yield remained flat at a negative 0.45%.
• Italy's 10-year benchmark yield fell by 17 bps to 1.06%.
• US benchmark Junk bond yields fell by 51 bps to 5.60%

INR ended the week higher against USD amid broad weakness in USD. However, RBI currency market intervention and simmering US-China tensions continued to put pressure on INR. INR appreciated by 0.26% against the USD last week and depreciated by 1.55% against the euro.

USD Index (DXY), which tracks the movement of the USD against six major currencies, fell nearly to its two years low level. DXY was down by 1.75% on a week on week basis and is at a level of 94.44. DXY has posted five consecutive weekly declines. USD weakness is largely attributed to the sharp rally in euro and concern over the strength of the U.S. economic recovery as the country struggles to curb the number of coronavirus cases.

Euro has rallied sharply against USD in the last few weeks on the expectation of a European relief package. European Union leaders on Tuesday finally clinched a deal on an unprecedented euro 1.8 trillion (USD 2.1 trillion) budget and coronavirus recovery fund. The EU's coronavirus recovery fund made up of euro 390 billion in grants and euro 360 billion in loans was seen as stabilizing the eurozone economy

China on Friday ordered the shutdown of the US consulate in Chengdu. The move was in retaliation to the US shutting down the Chinese consulate in Houston on allegations of spying and information theft. Top officials of the US administration have made remarks condemning China, which has made investors nervous about a further escalation in tension between Washington and Beijing.

Secretary of State Mike Pompeo said, "We opened our arms to Chinese citizens, only to see the Chinese Communist Party exploit our free and open society". National Security Adviser Robert O'Brien, FBI Director Christopher Wray, and Attorney General William Barr also made similar remarks against China.

Weekly Global Bond Market Analysis

US 10-year benchmark bond yield fell by 4 bps last week and are at levels of 0.59% amid geopolitical concerns between U.S.-China. In economic data, U.S. existing home sales in June slid 9.7% in May as the coronavirus pandemic continued to weigh on the U.S. real estate market.

The U.S. Treasury auctioned USD 17 billion of 20-year bonds on Wednesday. The influx of supply did not weigh on trading for long-dated government paper, reflecting how the rapid increase in new issuance due to increased fiscal spending has not deterred appetite for Treasuries.

In the upcoming week, the market will eye the Federal Reserves two-day meeting where the central bank may announce further policy measures on its bond purchases and even open the door to capping bond yields for certain maturities, or yield curve control.

Eurozone bond yields fell last week after European Union leaders on Tuesday finally clinched a deal on an unprecedented euro 1.8 trillion (USD 2.1 trillion) budget and coronavirus recovery fund.

German 10-year bond yields remained flat at negative 0.45%, France 10-year bond yields fell by 1 bps at negative 0.15%. Italys 10-year bond yield fell by 17 bps to a multi-month low level of 1.06% largely due to growing confidence in the eurozone outlook following the EU recovery fund deal which boosted southern European debt.

US benchmark Junk bond yield fell by 51 bps and is at 5.60%, Euro benchmark Junk bond yields fell by 24 bps to 4.10%.