RBI to Hold Rates, New 10 year G-sec to Stay Ranged

RBI to Hold Rates, New 10 year G-sec to Stay Ranged

Bond Market Snapshot For The Week

• New 10-year Gsec cut off at 5.77%
• 10-year benchmark yield closed at 5.84%, up by 2 bps on a weekly basis
• 5-year OIS yield declined by 7 bps to 4.17% on a weekly basis
• CCIL SDL Index closed at 6.3%, down by 5 bps on a weekly basis
• Liquidity continues to be in surplus at Rs 2.6 trillion

RBI policy this week will see no changes in monetary policy given that markets have largely been stable since its June policy. The government issued a new 10 year bond, which saw the auction cut off at 5.77% not very far down from the old 10 year bond yield, the 5.79% 2030 bond that was trading at levels of 5.80%. The lack of any interest in markets shifting from old to new benchmark bonds suggest that the heavy supply is limiting any downside to bond yields.

Since June, government bond yields have largely been stable while credit spreads have dropped for the higher quality issuers. Inflation has stayed above RBI target range of 4% while broad economic indicators continue to show weakness from IIP to vehicle sales to imports and exports. The monsoons have been above normal across the country and rural indicators such as tractor sales and agri input sales have shown robust growth indicating that the rural economy can pull up GDP growth despite large scale disruption to industrial activity.

The necessity for any monetary policy action is low and RBI will hold its ammunition for any further requirement.

The central bank will focus on expected bad loans once moratorium ends and this could be in the form of sops to borrowers, loan restructuring or formation of a bad bank.

During the weekly auction of Gsec, new 10-year Gsec cut off stood at 5.77%. The benchmark 10-year bond, the 5.79% 2030 bond, yield rose by 2 bps to 5.84% on a weekly basis. 6.45% 2029 bond yield increased by 6 bps to 5.96%. New 5-year benchmark 5.22% 2025 yield increased by 5 bps to 4.99%. The old benchmark 5-year bond, the 6.18% 2024 bond, yield rose by 4 bps to 4.89% while 7.17% 2028 bond yield increased by 5 bps to 5.87%. 6.68% 2031 yield rose by 4 bps to 6.14% and 6.19% 2034 yield level moved up by 2 bps 6.17% on weekly basis. Long term paper 7.16% 2050 yield rose by 1 bps to 6.41% on a weekly basis.

One-year OIS yield came down by 3 bps to 3.69% while the five-year OIS yield decreased by 7 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 2577 billion as of 31st July 2020. Liquidity was in a surplus of Rs 2155 billion as of 24th July 2020.

USD Claws Back Some Losses on Unemployment Rate Fall

Currency Market Snapshot For The Week

• INR appreciated by 0.02% against the USD last week and depreciated by 2.19% against the euro.
• USD fell by 1.15% on a week on week basis and is at a level of 93.35.
• The British pound appreciated by 2.27% against the USD
• Euro appreciated by 1.05% against the USD.

Global Bond Market Snapshot For The Week

• US 10-year benchmark bond yield fell by 5 bps and closed at 0.53% last week.
• German 10-year bond yield fell by 8 bps and is at negative 0.53%.
• Italys 10-year benchmark yield rose by 2 bps to 1.08%.
• US benchmark Junk bond yields fell by 16 bps to 5.44%

INR ended the week marginally higher against USD last week as USD continued its broad weakness. The rising tension between U.S.-China and rising cases of COVID-19 helped USD on its downward path. INR appreciated by 0.02% against the USD last week and depreciated by 2.19% against the euro.

USD continued its weakening streak and the USD Index (DXY), which tracks the movement of the USD against six major currencies, traded at close to its two years low level. DXY index is down by 1.15% on a week on week basis and is at a level of 93.35 and fell by nearly 4% during the month of July. USD weakening can be largely attributed to the impact from rising coronavirus cases of the economy, sharp appreciation of euro, falling yields, expiring stimulus benefits, and political tensions between U.S. & China.

The euro posted gains of nearly 5% in July against USD and has posted a gain of 11% since May, benefiting from the USD broad weakness and Europes decisive joint stimulus plan to combat the coronavirus. However, the contraction in the Eurozone economy in the second quarter was slightly worse than expected. France and Italy fared better than forecast, but Spain disappointed. Like the U.S., these numbers show the extent of COVID-19 damage on the Eurozone economy.

U.S. GDP declined at an annualized rate of 32.9% in the second quarter of 2020, better than the expected decline of 34.5%, but still the biggest decline on record. At the same time, the Labour Department reported that the number of U.S. citizens making initial claims for jobless benefits rose for the second straight week, albeit by only 12,000, to 1.434 million.

Further, on Thursday President Donald Trump suggested delaying the 2020 election, which is against the Constitution. However, Republicans were quick to reject the idea, but market participants fear that the sitting President will try to delegitimize the election in other ways. This grim political and economic outlook will continue to keep the USD under pressure in the coming weeks.

During the week, the market remained jittery about diplomatic relations between the US and China after Beijing took over the US consulate in the southwestern city of Chengdu. This comes after Washington ordered the closure of the Chinese consulate in Houston last week.

US Federal Reserve in its last weeks FOMC meeting kept interest rates at near zero and vowed to use all available tools to support the recovery from the most severe economic downturn. Fed Chairman Jerome Powell said at a press conference on Wednesday that the Fed tied economic recovery to an end to the COVID-19 pandemic. Fed Chairman warned that there are signs that increases in the number of COVID-19 cases are starting to weigh on economic activity.

Rising cases of COVID-19 across the globe have led to fears that the pace of economic recovery may be slower than anticipated earlier. The UK government imposed a quarantine on travelers returning from Spain, where cases of COVID-19 surged in the last few weeks.

Weekly Global Bond Market Analysis
US 10-year benchmark bond yield fell by 5 bps last week and is at levels of 0.53% as U.S. growth in the second quarter of this year confirmed the economic devastation caused by the COVID-19 pandemic. The worrisome economic data has increased the likelihood that interest rates will remain low for an extended period of time, as the Federal Reserve has pledged to lift interest rates only once unemployment recovers and inflation picks up.>Eurozone bond yields fell last week with German 10-year bond yields falling by 8 bps to negative 0.53%, France 10-year bond yields fell by 4 bps to negative 0.20%. Italys 10-year bond yield rose by 2 bps to a level of 1.08%.US benchmark Junk bond yield fell by 16 bps and is at 5.44%, Euro benchmark Junk bond yields rose by 6 bps to 4.16%.