Bond market will go circumspect into the 17th June RBI policy review as expectations of rate cuts have come off on the back of INR volatility. The INR is trading at close to all time lows against the USD and RBI will sound cautious in the policy statement on the back of a weak INR impact on inflation and the economy. The ten year benchmark bond yield, the 7.16% 2023 bond, closed flat last week at 7.24% levels and this week could see yields trending higher as players adjust positions into the policy review.
RBI’s OMO (Open Market Operation) bond purchase auction did not lift sentiments in the market. RBI bought Rs 6800 crores of bonds in its Rs 7000 crores OMO auction on the 7th of June. RBI conducted the OMO to reduce any liquidity impact of advance tax outflows from the system. The first quarter advance tax payment is on the 15th of June and as the money goes into government coffers, it results in liquidity deficit in the banking system. Advance tax for June 2012 was Rs 32,000 crores and advance tax is likely to be around Rs 32,000 crores for June 2013 given weak growth in corporate profitability. The 7th June OMO is the second of the OMOs done in fiscal 2013-14, with the first OMO auction for Rs 10,000 crores held on the 3rd May 2013.
Liquidity as measured by bids for repo in the LAF (Liquidity Adjustment Facility of the RBI) eased last week. Bids for repo averaged Rs 61,300 crores on a daily basis last week against an average of Rs 89,000 crores seen in the week previous to last. Liquidity could tighten this week on higher demand for funds by banks in the reporting week.
The credit market saw one year CD (Certificate of Deposit) yields rise by 5bps week on week to close at 8.25% levels. CD yields rose on the back of expectations of liquidity tightening due to advance tax outflows. Corporate bond yields closed almost flat last week, following government bond yields.
OIS yield curve inverted by 4bps last week with five year OIS yields coming off by 3bps and one year OIS yields rising by 1bps. One year OIS yields are factoring in tight liquidity conditions and no rate cuts in RBI 17th June 2013 policy review.
The government will release IIP (Index of Industrial Production) data for April 2013 this week. IIP growth for March 2013 was 2.9%. Lower IIP growth for the first month of fiscal 2013-14 will have markets worried on growth prospects for the economy. Inflation numbers for May 2013 is to be released this week. WPI (Wholesale Price Inflation) printed at 4.89% for April 2013 and if it prints lower for May, markets will look to factor in rate cuts in RBI’s July 2013 policy review.