RBI policy on the 30th of September will see the central bank maintaining status quo on policy rates. The Repo Rate, CRR (Cash Reserve Ratio) and SLR (Statutory Liquidity Ratio) will be held at 8%, 4% of NDTL (Net Demand and Time Liabilities) and 22% of NDTL respectively. The RBI would lower the HTM (Held to Maturity) portfolio limit by 50bps to 100bps from 24% of NDTL to 23% of NDTL to bring the limit in line with SLR of 22% of NDTL. RBI in its last policy review in July lowered the SLR and HTM by 50bps each.
Dr. Raghuram Rajan, the RBI Governor, is keen on maintaining stability in the policy stance, which is now focused on CPI (Consumer Price Index) inflation trending down to levels of 6% by January 2016 from current levels of 7.80%. He is also focusing on stability in the internal value of the INR, which is helping the INR withstand the USD strength in the face of expectations of Fed rate hikes.
India’s credit rating has been upgraded from BBB negative to BBB stable on the back of the government’s commitment to lower fiscal deficit and bring about sustainable growth. The upgrade will lend stability to the INR.
Bond market is not expecting any rate surprises from the RBI on the 30th of September and is bracing itself for a HTM cut. However given the benign borrowing calendar for the second half of this fiscal coupled with easing liquidity conditions, the HTM cut will not impact bond yields negatively.
The government is scheduled to borrow Rs 2400 billion through bond auctions in the April-March 2014 period.
The borrowing is Rs 80 billion less than budgeted borrowing of Rs 2480 billion, including buy back of Rs 500 billion. Of the Rs 2400 billion gross borrowing, Rs 500 billion will be for bond switches where the government will buy back short maturity bonds and issue long maturity bonds in order to lower repayment obligations coming up in the next few years. Bonds worth Rs 500 billion are maturing in the second half, of which around Rs 120 billion has been bought back by the government. Net government borrowing including buy backs and redemptions will be around Rs 1500 billion.
Liquidity is easing in the system with RBI steadily buying USD to shore up foreign exchange reserves. RBI has infused Rs 920 billion of liquidity through spot USD purchases of USD 15 billion. Government surplus of around Rs 1000 billion is helping negate the liquidity impact of RBI USD purchases. 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 516 billion last week from Rs 534 billion seen in the week previous to last.
System is well funded and liquidity is unlikely to tighten significantly in October despite festive season demand for funds.
Government bond yields fell marginally week on week on the back of improved bond market environment . The ten year benchmark bond, the 8.40% 2024 bond saw yields fall by 2bps to close at 8.44% levels. The ten year bond yield will be ranged in the coming weeks as the markets waits for the first auction in October that is scheduled on the 10th of October.
OIS market saw the yield curve inverting week on week. One year OIS yield fell 3bps while five year OIS yield fell 8bps to close at levels of 8.40% and 7.80% respectively. The Five over One OIS spread inverted by 5bps to close at negative 60bps levels. The curve should start flattening from these levels as liquidity is expected to ease going into October 2014.