RBI is auctioning Rs 100 billion of 42 days Cash Management Bills (CMB) on the 10th of November 2014. CMB are issued to meet temporary mismatches in government finances. The government that was running a surplus of over Rs 1000 billion in mid October 2014 has drawn down its surplus and is now availing of overdraft from the RBI through WMA (Ways and Means Advances). The WMA limit for the second half of fiscal 2014 is Rs 200 billion and utilization of over 75% of the limit would trigger market loans.
The government would repay the CMB from advance tax payments that it receives in mid December. Government has redeemed around Rs 400 billion of bonds that matured in late October and early November and that has impacted its cash position.
System liquidity eased considerably on government drawing down on its surplus and availing of WMA. System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and 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 176 billion last week from Rs 566 billion seen in the week previous to last. RBI had sucked out Rs 100 billion through OMO auction held on the 5th of November. RBI is also conducting term reverse repo auctions to suck out system liquidity and keep overnight rates around repo rate level of 8%.
RBI will have to actively manage liquidity to keep money market rates at around repo rate levels. The bond market will continue to flatten the yield curve as it builds position in anticipation of rate cuts down the line.
The benchmark long bond, the 9.23% 2043 bond, saw yields fall by 7bps week on week to close at levels of 8.29%. The spread between the 9.23% 2043 bond and the ten year benchmark bond, the 8.40% 2024 bond, is at levels of 9bps. The 8.24% 2024 bond saw yields fall 7bps week on week to close at levels of 8.20%.
The RBI issued a new nineteen year maturity bond on the 7th of November 2014. The bond saw the cut off come in at levels of 8.24%. The spread between the ten year and nineteen year bond is just 4bps. The bond market is flattening the yield curve as short end yields are kept in check by RBI managing liquidity.
OIS yield curve fell last week with five year OIS yield falling by 8bps to close at levels of 7.41% and one year OIS yield falling by 10bps to close at levels of 8.01%. Five year OIS yield is factoring in rate cuts by the RBI while one year OIS yield is reacting to RBI management of liquidity.