The government that carried a surplus of Rs 1500 billion into April 2016 has spent its entire surplus and its cash position stands at just around Rs 20 billion as of 22nd April. Government spending its surplus has infused funds into the system improving liquidity conditions. However as of 22nd April, the system is still drawing down Rs 991 billion from the RBI indicating the extent to which the system was in deficit last month.
RBI is looking to bring down the liquidity deficit in the system to zero and that would require infusing liquidity through OMO bond purchases and USD purchases. RBI has carried out one OMO purchase auction of Rs 150 billion in April and has also been seen buying USD. However, RBI will have to undertake many more OMO purchase auctions and buy more USD to bring down the liquidity shortfall from Rs 990 billion.
Bond markets would be watching out for OMO auctions and that would lend direction to bond yields going forward.
Government bond markets saw yields close marginally higher last week as the RBI did not conduct any OMO bond purchase auctions. The benchmark ten year bond, the 7.59% 2026 bond saw yields closing up by 2bps at 7.46% levels. The 8.27% 2020 bond saw yields rising by 1bps to close at 7.38% levels. The 7.88% 2030 bond saw yields rising by 1bps to close at 7.77% levels while the 8.13% 2045 bond saw yields closing flat at 7.81% levels. Government bond yields are likely to stay ranged as markets await RBI liquidity moves.
OIS market saw one year OIS and five year OIS yields close down week on week. One year OIS yield fell 1bps and five year OIS yield fell 1bps to close at 6.69% and 6.72% respectively. OIS yield curve will steepen on easing liquidity conditions.
Benchmark AAA corporate bond spreads rose last week on profit taking. Three year bond yields rose by 5bps to 7.88% levels with spreads up by 9bps at 48bps levels. Five year bond yields were up 16bps at 8.08% with spreads up by 15bps at 56bps levels while ten year bond yields were up 4bps at 8.17% with spreads up 3bps at 57bps levels. Corporate bond yield and spread curve will fall as market searches for yields amidst accommodative monetary policy.
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 Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) was in deficit of Rs 991 billion as of 22nd April. The deficit was Rs 845 billion in the week previous to last. Government surplus was at levels of Rs 23 billion last week, lower by Rs 1100 billion week on week. Liquidity will ease as RBI pumps in liquidity through fx purchases and OMOs.