Money markets saw liquidity suddenly easing in the system with bids for reverse repo at 7% in the LAF (Liquidity Adjustment Facility) auction of the RBI touching Rs 372 billion on the 2nd of July. RBI held a term reverse repo auction for Rs 200 billion for 4 days to suck out excess liquidity, however markets bid just Rs 2 billion in the auction at 8% levels. Overnight call, cblo and repo rates trended below 8% repo rate levels as markets gave funds to the RBI at 7%.
Markets are yet to determine if liquidity will consistently be positive in the system, hence the reluctance to lend to the RBI in term reverse repo auctions even for four days. Outstanding term repo amount is Rs 610 billion that is due to mature on the 11th of July. Will markets bid for the full term repo amount of Rs 610 billion if the RBI conducts a 14 day term repo auction on the 11th of July? Remains to be seen.
The easing of system liquidity is attributable to government spending advance tax money collected mid June 2014, estimated at over Rs 600 billion. RBI buying of USD at around levels of Rs 60 to add on to the fx reserves is also a source for liquidity. RBI has bought USD 13 billion in the March, April period and as its currency purchases data are released after a lag of one month, markets will have to wait to see how much of USD RBI has bought in May and June.
RBI has been active in forward markets as well and was seen buying forward USD, tenors of which are not revealed. RBI forward purchases have taken up forward premia to levels of over 8.5% across 1month to 12 months maturities. The rise in forward premia is opposite to the fall in overnight rates on excess system liquidity. This is confusion money markets and until RBI stops intervention, distortions may remain.
Government bond yields fell by 3bps to 13bps across the curve last week as sound bytes from the FM, Arun Jaitley on the need to contain fiscal deficit enthused markets. The Modi budget 2014 is scheduled on the 10th of July and markets will be eagerly awaiting the fiscal deficit and borrowing numbers.
OIS market saw one year OIS yields falling by 2bps and five year OIS yields falling by 11 bps to close at levels of 8.34% and 7.82% respectively. The five over one OIS spread inverted by 9bps to close at negative 52bps levels. OIS yields could be volatile on many factors such as budget 2014 and forward premia rates.
Corporate bond yields fell week on week on the back of lower government bond yields. Five year AAA corporate bond yields closed at levels of 9.17% down 5bps week on week while ten year AAA corporate bond yields stayed flat at levels of 9.15%. Credit spreads rose with five year and ten year spreads rising by 3bps and 8bps to close at 44bps and 28bps levels respectively. Tight credit spreads could see market preferring to go long on government bonds.