The RBI is auctioning Rs 22,000 crores of Cash Management Bills (CMB) every week in order to suck out liquidity from the system. Last week’s auction of CMB saw cut offs for the Rs 11000 crores each of 35 days and 34 days CMB auction coming in at 11.71% and 11.94% respectively. The CMBs mature on the 17th of September. RBI is auctioning Rs 11,000 crores each of 28 days and 27 days CMB this week. The CMB matures on the 17th of September.
CMB auctions are taking liquidity out of the market. The market is borrowing around Rs 38,000 crores on a daily basis in the LAF (Liquidity Adjustment Facility) auctions of the RBI. Borrowing under the MSF (Marginal Standing Facility) is around Rs 33,000 crores. CMB auctions take out liquidity from the system if the government does not spend the money.
The money taken out of the system through CMB auctions will come back into the system through bond redemptions. The government will be redeeming Rs 11,983 crores of 12.40% 2013 bond on the 20th of August and Rs 46,000 crores of 7.27% 2013 bond on the 3rd of September 2013. The CMB are raised to fund Rs 58,000 crores of bond maturities.
The government expects to repay the CMB maturing on the 17th of September from the second quarter advance tax collections. Hence the CMB auctions that are taking out liquidity from the system in August will improve system liquidity in September as money comes back in the form of bond maturity and CMB maturities.
Bond markets had one of the most volatile weeks seen in the last five years with yields spiking by 55bps to 75bps across the curve. The ten year benchmark bond the 7.16% 2023 bond saw yields shoot up by 73bps week on week on the back of the RBI trying to protect the INR from weakening against the USD. RBI is issuing Rs 22,000 crores of CMB every week and has lowered limits on overseas investments by resident Indians and Indian Corporates. The INR fell to all time lows of Rs 62 to the USD on the back of the capital controls placed by the RBI and bond markets sold off on worries of FII’s pulling out money from INR bonds.
RBI indicated to the market that it would not protect bond yields from moving up as it cleared bids at higher yields in all auctions. RBI cleared CMB auction bids at over 11.70% levels and government bond auctions at levels of 8.74% and 9.20%. The market sold off on account of the RBIs willingness to accept bids at higher levels of yields.
Government bond yields will trend at higher levels given INR trading at record lows.
Corporate bond yields followed government bond yields higher with five and ten year benchmark AAA corporate bond yields moving up by 60bps and 75bps respectively. Five and ten year AAA credit spreads closed almost flat at 102bps and 58bps levels respectively. Corporate bond yields are likely to remain sticky at higher levels of yields and credit spreads will move on the back of movement in government bond yields.
OIS (Overnight Index Swap) yield curve rose last week with one and five year OIS yields rising by 75bps and 56bps respectively. The OIS yield curve inverted further to levels of 106 bps from levels of 87bps on the back of RBI strangling liquidity. The inversion could come off as liquidity outlook improves in September.