RBI has been pumping in liquidity through Repos to make up for a shortfall of Rs 2.2 trillion of liquidity in the system. Government cash balances swelled to Rs 1.4 trillion on the back of advance tax collections, which is estimated at around Rs 700 billion while currency in circulation has gone up by Rs 800 billion since the beginning of February 2018. The volatility in the INR that has been trading at over Rs 65 to the USD on account of global financial market risk aversion on US-China trade wars and on account of scams in domestic banks has also led to mild liquidity pressure, as RBI has stepped in to sell USD to calm the currency markets. INR was stable at around Rs 64 to the USD for a large part of 2017 before reacting to global and domestic events.
Liquidity will come back into the system in April as government front loads spending for fiscal 2018-19 and the system releases year end cash hoards.
Bond markets will await the borrowing calendar for the first half of fiscal 2018-19 and RBI policy on the 4th and 5th of April before taking any directional positions in yields.
The old 10 year benchmark government bond, the 6.79% 2027 bond, saw yields fall by 1bps week on week to close at levels of 7.72% while the new benchmark 10 year bond, the 7.17% 2028 bond, saw yields fall by 1bps to close at 7.55%. The on the run bond, the 6.79% 2029 bond saw yields close 2bps up at 7.67% levels and the 6.68% 2031 bond saw yields close down by 1bps at 7.81%. The long bond, the 7.06% 2046 bond saw yields close up 6bps at levels of 7.95%. Bond yields will tend to stay ranged till RBI policy next week.
The OIS market saw 5 year OIS yields closing 6bps up week on week at levels of 6.84%. The one year OIS yield closed up by 3bps at 6.48%. OIS yields will track government bond yields this week.
Corporate bonds saw 5 year AAA corporate bond yields close down by 1bps at levels of 7.96% and 10 year AAA corporate bond yields close down by 9bps at 8.24%. 5 year AAA spreads fell by 6bps at 45bps and 10 year AAA spreads fell by 9bps at 54 bps. Credit spreads will move on movements in government bond yields as corporate bond yields will stay sticky at higher levels.
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) and MSS/CMB bond issuance was in deficit of Rs 688 billion as of 23rd March 2018. The deficit was Rs 369 billion as of 16th March. Liquidity will get tight this week on fiscal year end demand for funds.