Bond Market Snapshot For The Week
· India’s GDP grew 4.7% in the third quarter of fiscal 2019-20
· Fiscal Deficit touches 128% during Apr-Jan FY20
· Bond switches auction of Rs 370 billion conducted on 24th of February
· Rs 250 billion of Long Term Repo was auctioned
· 5 year OIS yields declined by 24 bps to 5.22%
· Liquidity continues to be in a huge surplus of Rs 4.38 trillion
The impact of the corona virus is felt in bond yields globally with US 10 year treasury yields plunging to record lows while Japan and Eurozone bond yields are in deeply negative territory. Bond markets are expecting economic growth to plunge sharply across economies, keeping down inflation and forcing central banks to go extremely accommodative in their policies. Read our Global Bond Market Analysis for details.
India is caught right in the middle of the coronavirus repercussions, as it will feel the effects of a global economic slowdown. India’s GDP growth has already plunged to 4.7% levels in the 3rd quarter of fiscal 2019-20 and recovery will not happen as anticipated by the government on the back of the coronavirus issues. The government forecasted GDP growth at 6% to 6.5% for the fiscal year 2020-21.
GDP growth staying down will hurt the fiscal math of the government, as it has forecast a fiscal deficit of 3.5% of GDP based on nominal GDP growth of 10%. Tax revenue targets will take a hit and the government will be forced to spend more to pump prime the economy and this could lead to a sharp widening of the fiscal deficit from projected levels of 3.5% of GDP.
Widening fiscal deficit would mean borrowing shooting up both at the center and state level and this will lead to a massive supply of bonds. Read our note on Budget Borrowing for details of bond supply.
A massive supply of bonds can lead to a demand-supply mismatch, which can pull up bond yields even if RBI cuts rates to record lows and also steps in to buy bonds to support the borrowing.
The benchmark 10-year bond, the 6.45% 2029 bond, yield came down by 5 bps to 6.37% on a weekly basis. Similarly, the benchmark 5-year bond, the 6.18% 2024 bond, yield decreased by 11 bps to 5.87% while 7.17% 2028 bond yield declined by 5 bps to 6.53% while the 6.68% 2031 yield level came down by 1 bps to 6.67% on a weekly basis.
One-year OIS yield declined by 16 bps to 4.97% while the five-year OIS yield decreased by 24 bps to 5.02% 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 and drawdown from Standing Facility (MSF or Marginal Standing Facility) was in surplus of Rs 4382 billion as of 28th February 2020. Liquidity was in a surplus of 4174 billion as of 20th February 2020.