Bond market will not be too enthusiastic on taking down bond yields despite GDP growth for the first quarter of fiscal 2013-14 coming in at levels of 4.4%, well below official forecast growth levels of 5.5% for the full year. Market was expecting GDP growth to come in at 4.8%. In normal circumstances, falling GDP growth would indicate monetary easing by the RBI, which is positive for bond yields. However the economic environment is not normal at present with the INR on a free fall against the USD. The INR has depreciated by around 25% since the beginning of this fiscal year.
The bond market is seeing no respite from supply. The RBI is auctioning Rs 22,000 crores of CMB (Cash Management Bills) and Rs 15,000 crores of government bonds this week. The OMO (Open Market Operations) purchase auctions held by the RBI for Rs 8000 crores is not helping cool down bond yields as RBI is accepting bids at around market levels. The ten year benchmark bond, the 7.16% 2023 bond saw yields close up by 34bps week on week on the back of a plunging INR that touched record lows of Rs 68.80 before strengthening to close the week at levels of Rs 65.71.
RBI was seen selling USD to stem the INR fall. USD sales impact system liquidity negatively and with RBI issuing CMB to tighten liquidity, the system is starved of funds. The government redeems Rs 46,000 crores of bonds this week and this will help ease liquidity conditions.
Government finances are looking bad. The fiscal deficit for the first four months of the fiscal stood at close to 63% of full year target. Fiscal deficit was Rs 341,000 crores against full year target of Rs 520,000 crores. The government is financing 90% of the deficit through market borrowings. Weak GDP numbers indicated falling tax collections leading to more pressure on the INR. The strong monsoons for this year is the only bright spot for the economy as second half prospects could brighten on the back of growth in agriculture.
Bond yields can go down only if RBI reverses its liquidity stance and adopts a pro growth policy but the weak INR is hampering the central bank in its efforts to help the economy.
Corporate bond yields moved higher with five and ten year benchmark AAA corporate bond yields rising by 10bps and 35bps week on week. Corporate bonds are finding a range at higher levels with two, five and ten year yields at levels of 10.5%, 10.10% and 9.75% respectively. Markets will trade corporate bonds on the basis of absolute yields rather than spreads.
OIS yield curve moved up with one and five year OIS yields rising by 8bps and 12bps week on week. OIS yields are likely to move around current levels given INR volatility.
Liquidity tightened last week with borrowing under MSF (Marginal Standing Facility) rising by Rs 8,000 crores. MSF borrowing was Rs 65,900 crores as of 29th August against levels of Rs 58,000 crores seen on the 23rd of August. Repo borrowing was at around Rs 39,700 crores in the LAF (Liquidity Adjustment Facility) auctions of the RBI.