Bond Market Snapshot For The Week
· RBI kept repo rate unchanged while maintaining the accommodative stance
· RBI to conduct term repos (LTRO) of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1 trillion at the policy repo rate
· Government bond yields fell sharply post RBI policy
· 5 year OIS yields declined by 31 bps to 5.11%
· Liquidity continues to be in a huge surplus of Rs 5 trillion
RBI is pumping in money into the markets at cheap rates to encourage banks to lend and also to invest in credit markets. The question is will such Helicopter tactics work in India without destabilizing the system in the longer term? This remains to be answered. In the meanwhile, markets will help itself to cheap money and try to profit heavily from it.
The term “Helicopter Ben” was phrased on the back of the Fed under the Chair of Ben Bernanke poured money into the system post the 2008 credit crisis. RBI too is doing the same with system liquidity at levels seen during the time of demonetization. System liquidity is at levels of Rs 5 trillion on the back of RBI USD purchases and government spending.
RBI removed the liquidity target policy of +/- 1% of NDTL (Net Demand and Time Liabilities) in its policy review last week. This would mean that RBI will not suck out excess liquidity from the system through OMOs or other longer term tools. The markets are free to play around with the huge liquidity.
Bond markets will start factoring in more rate cuts given that the central bank has stated that there is room to cut rates on negative output gap. Inflation forecast for q3fy21 is 3.2% from current levels of over 7%, indicating that RBI expects inflation to fall sharply going forward.
RBI is also giving cheap long term money to banks at the repo rate through LTROs. Read our RBI policy note for details. The central bank may even buy bonds through OMOs if it believes that it is required to keep bond yields low to support economic growth.
The only fear in the market is the huge government bond supply of Rs 7.8 trillion for next fiscal year, which can go higher if revenue growth expectations are weak. However this fear will only act up much later in the year as government borrowing will only exceed targets (if it exceeds) in the second half of the year.
The benchmark 10-year bond, the 6.45% 2029 bond, yield declined by 16 bps to 6.44% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield came down by 36 bps to 6.04% while 7.17% 2028 bond yield decreased by 24 bps to 6.61%. Similarly, 6.68% 2031 yield level declined by 15 bps to 6.77% on a weekly basis.
One-year OIS yield came down by 21 bps to 5.06% while the five-year OIS yield declined by 31 bps to 5.11% on a weekly basis.
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facility (MSF or Marginal Standing Facility) was in surplus of Rs 5124 billion as of 7th February 2020. Liquidity was in a surplus of Rs 4198 billion as of 31st January 2020.