MSS bond issuance signifies very high levels of fx purchases by the RBI. Inflation will rise and long end government bond yields will rise but corporate bonds will benefit as money flows into higher yielding short term assets.
Joe Biden winning the US Presidential elections will weaken the USD as the government will float a fresh and huge fiscal package to shore up the covid hit US economy. Fed has indicated continued record low rates and bond purchases, adding huge amounts of USD liquidity into the system.
India will be a beneficiary of the US fiscal and monetary stimulus, and there will be strong capital flows into the country given higher rates and stronger growth. The INR will appreciate and RBI will buy fx to keep the INR from appreciating too fast.
RBI buying fx in addition to its already aggressive purchases in this fiscal year, will add huge liquidity into the system, that could potentially raise inflation expectations. Hence to sterilize the liquidity to keep inflation in check, RBI will again have to issue MSS or market stabilization scheme bonds. Such bonds were last issued in the 2005 to 2007 period when India saw high capital flows.
India’s forex reserves stood at USD 560.71 billion as of 30th October 2020 as compared to USD 475.56 billion as of 27th March 20. RBI has bought Rs 5975.51 billion or USD 85.15 billion of forex asset during current fiscal year.
As of 23rd October, domestic aggregate deposit stood at Rs 143 trillion, up by 10.1% on yearly basis while it grew by 5.3% since the beginning of current fiscal year. In absolute terms, it rose by Rs 13.15 trillion on yearly basis and by Rs 7.25 trillion during FY21.
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 4163 billion as of 05th Nov 2020. Liquidity was in a surplus of Rs 3278 billion as of 29th Oct 2020.
Government bonds, SDL and OIS yield movements.
During the week, the 5.77% 2030 yield decreased by 1 bps to 5.87%, while 5.79% 2030 bond yield came down by 2 bps to 5.87%. 6.45% 2029 bond yield declined by 1 bps to 5.96%. 5-year benchmark bond, 5.22% 2025, yield decreased by 3 bps to 5.14%. 6.57% 2033 yield rose marginally by 1 bps to 6.24%. 6.19% 2034 yield level lost 2 bps to 6.21%. On the other hand, long term paper 7.16% 2050 yield rose by 4 bps to 6.67%.
The spread of 10-year bond over 5-year bond (5.22% 2025) stood at 73 bps as compared to 72 bps previous week. The 15-year benchmark over 10-year benchmark spread decreased to 32 bps from 34 bps. 30-year benchmark over 10-year benchmark spread rose to 82 bps from 79 bps.
In the SDL auction conducted last week, average 10-year SDL yield remained stable at 6.46% as compared to 6.45% in previous week. Consequently, spread with G-sec benchmark stood at 56 bps from 58 bps.
On weekly basis, 1-year OIS yield came down by 3 bps to 3.59% while 5-year OIS yield rose by 4 bps to 4.36%.