Bond yields retraced from lows on the last trading day of a truncated week on the back of RBI intervention in the fx markets. The benchmark ten year bond the 7.59% 2026 bond saw yields rising by 3bps from lows of 7.41% to close at 7.44% levels. The INR had dropped to an intraday low of Rs 66.31 to the USD on Wednesday on equity markets rallying sharply but then fell 0.5% to Rs 66.64 on RBI support for the USD. RBI buying USD could mean that there could be fewer OMO purchase auctions. RBI in its policy on the 5th of April stated that it could add liquidity through OMOs as well as through USD purchases.
RBI is gearing up for over USD 30 billion of outflows as FCNR B deposits come up for maturity in the September to November 2016 period. . RBI had also put out a statement that while the FCNR B position was covered through forward USD purchases, there would be a maturity mismatch leading to volatility in both fx reserves and liquidity. Liquidity could surge before September 2016 as forward purchases mature and then will see outflows as the FCNR B swaps mature.
The Industrial production and inflation data were largely positive for bond markets as it suggests muted but improving industrial activity and largely benign inflation environment. IIP (Index of Industrial Production) growth for the month of February 2016 came in at 2% against negative 1.5% growth seen in January 2016. Manufacturing growth was at 0.7% against negative 2.8%. IIP and manufacturing growth for the April-February 2016 period was at 2.6% and 2.3% respectively.
Inflation as measured by the CPI fell to six months lows of 4.83% in March 2016. Food inflation fell to 5.21% from 5.30% seen last month.
Government bond markets saw yields close marginally down last week. The benchmark ten year bond, the 7.59% 2026 bond saw yields closing down by 1bps at 7.44% levels. The 8.27% 2020 bond saw yields rising by 1bps to close at 7.37% levels. The 7.88% 2030 bond saw yields falling by 1bps to close at 7.75% levels while the 8.13% 2045 bond saw yields falling by 1bps to close at 7.81% levels. Government bond yields are likely to trend down on reduced fears of supply absorption.
OIS market saw one year OIS and five year OIS yields close up week on week with the one over five OIS spread steepening. One year OIS yield rose 3bps while five year OIS yield rose 5bps to close at 6.70% and 6.73% respectively. OIS yield curve will steepen on easing liquidity conditions.
Benchmark AAA corporate bond spreads fell last week on improved outlook for liquidity. Three year bond yields were flat at 7.83% levels with spreads down by 3bps at 39bps levels. Five year bond yields were down 6bps at 7.92% with spreads down by 10bps at 41bps levels while ten year bond yields were down 3bps at 8.13% with spreads down 3bps at 54bps 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 845 billion as of 15th April. The deficit was Rs 1229 billion in the week previous to last. Government surplus was at levels of Rs 112 billion last week, lower by Rs 650 billion week on week. Liquidity will ease further as RBI pumps in liquidity through fx purchases and OMOs.