Bond Market Snapshot For The Week
· Consumer inflation soared to 7.59% in Jan 20 driven by higher food prices. Core inflation rose to 4.2% from 3.8% seen in December 2019.
· Index of Industrial Production growth contracted by 0.3% y-o-y in December 2019
· 5 year OIS yields declined by 2 bps to 5.09%
· Liquidity continues to be in a huge surplus of Rs 4.5 trillion
Bond market is shrugging off CPI inflation printing at 6 year highs and core inflation rising above 4% after many months. RBI has clearly stated in its policy review this month that inflation is likely to stay high in the next couple of quarters but will then start to trend down to below its target levels in the 3rd quarter of fiscal 2020-21.
RBI’s focus is clearly on growth and it is doing all it can to push up economic growth that has slowed down to 5% levels in this fiscal year. China’s coronovirus impact is already seeing growth outlook come off globally and oil prices have fallen by 25% from highs seen last year on demand worries. In this regard, monetary policy is focused on throwing cheap liquidity to the system and easing banks regulation on provisioning for growth affected MSMEs and also removing CRR requirements for loans to auto, housing and MSMEs disbursed over the next six months.
RBI is also making sure through Operation Twists that long bond yields stay stable despite government exceeding its fiscal deficit targets. Bond markets will not have much appetite to short bonds despite supply given RBI intervention on yields.
Government is also likely to tap FIIs through no limit issuances for inclusion in global bond indices, which can prompt more FII money flowing into INR Bonds. Global bond issuances are also on cards and could happen in the next fiscal year and all these issuances will release pressure on domestic investors to absorb the government bond supply.
Excess liquidity will start to flow to credit markets given the higher spreads available.
The benchmark 10-year bond, the 6.45% 2029 bond, yield declined by 7 bps to 6.37% on a weekly basis. The benchmark 5-year bond, the 6.18% 2024 bond, yield came down by 10 bps to 5.94% while 7.17% 2028 bond yield decreased by 8 bps to 6.53%. Similarly, 6.68% 2031 yield level declined by 10 bps to 6.67% on a weekly basis.
One-year OIS yield rose by 4 bps to 5.10% while the five-year OIS yield increased by 6 bps to 5.17% 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 4518 billion as of 14th February 2020. Liquidity was in a surplus of Rs 5124 billion as of 7th February 2020.