RBI cut the Repo Rate by 25bps and changed its liquidity stance from keeping the system net deficit to neutral. RBI also brought down the Repo – Reverse Repo – MSF spread from 100bps to 50bps. RBI effectively cut rates by 75bps in its 5th April policy.
RBI in order to bring down liquidity from deficit to neutral, with the deficit being pegged at around 1% of NDTL or around Rs 900 billion, will be infusing liquidity through OMO (Open Market Operations) bond purchases. RBI can also infuse liquidity through USD purchases but with the INR under stress from global risk aversion, this will not be the right time to buy USD.
RBI is likely to purchase Rs 750 billion of bonds through OMO in the first half of this fiscal year with the first auction already held on the 7th of April.
RBI bond purchases coupled with FII purchases on fresh limits and bond redemptions will bring down net government borrowing for the first half leading to the bond auctions seeing good demand. FII limits of Rs 260 billion will be released in the first half while bond redemptions amount to Rs 1068 billion. Put together, RBI +FII+ Bond Redemptions = Rs 2000 billion. The government is scheduled to borrow a gross amount of Rs 3600 billion in the first half. The market will have to absorb only Rs 1600 billion of borrowing over the first six months of the fiscal year, which is easily absorbable given bullish market conditions.
Government bond yields will trend down by 50bps in the first half of this fiscal year.
Government bond markets saw yields falling post RBI policy. The benchmark ten year bond, the 7.59% 2026 bond saw yields closing down by 1bps at 7.45% levels. The 8.27% 2020 bond saw yields falling by 5bps to close at 7.36% levels. The 7.88% 2030 bond saw yields falling by 6bps to close at 7.76% levels while the 8.13% 2045 bond saw yields falling by 9bps to close at 7.82% levels. Government bond yields are likely to trend down on reduced fears of supply absorption.
OIS market saw one year OIS yields close down and five year OIS yields close up week on week with the one over five OIS spread flattening out. One year OIS yield fell 3bps while five year OIS yield rose 7bps to close at 6.67% and 6.68% respectively. OIS yield curve will steepen on easing liquidity conditions.
Benchmark AAA corporate bond yields fell last week on bullish RBI policy. Three year bond yields fell 13bps to close at 7.83% levels with spreads down by 5bps at 42bps levels. Five year bond yields were down 17bps at 7.98% with spreads down by 9bps at 51bps levels while ten year bond yields were down 12bps at 8.16% with spreads down 11bps 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 1229 billion as of 8th April. The deficit was Rs 3300 billion in the week previous to last. Government surplus was at levels of Rs 740 billion last week, lower by Rs 750 billion week on week. Liquidity will ease further as bond redemption of Rs 350 billion is paid out on 12th April and on RBI OMO purchases.