The bond market will go into the 30th July RBI policy review on a hopeful note. The market will expect the central bank to maintain status quo on policy rates of CRR (Cash Reserve Ratio) and Repo. The fact that RBI’s liquidity tightening measures have had the desired effect of taking up money market yields to prevent speculation in USD/INR is the reason for expectations of policy rates being kept unchanged. The INR has strengthened by over 1.5% against the USD in the last couple of weeks and while the central bank will be watchful of further volatility, it will not take more measures on the rate front at this juncture to give more strength to the currency.
Government bond yields closed well off highs seen mid week. The ten year benchmark bond the 7.16% 2023 bond saw yields close at 8.13% levels down from highs of 8.47% seen during the week. Bond yields moved up sharply midweek as the RBI imposed fresh restrictions on banks access to the LAF (Liquidity Adjustment Facility) window for funds. The yield on the 7.16% 2023 moved up from 8.17% levels pre RBI announcement to 8.47% levels post RBI announcement, before coming off to levels of 8.13%. Government bond yields are likely to trend down if the RBI holds rates in its policy review.
The short end of the yield curve bore the brunt of RBI’s liquidity tightening measures. 91 day and 364 day T-bill yields rose by 250 bps and 200 bps respectively in the weekly auctions with cut offs coming in at 11% and 10.50%. The government auctioned Rs 6000 crores of Cash Management Bills (CMBs) to suck out liquidity from the system. The cut offs on the 28 days and 56 days CMBs came in at levels of 11.18% and 11.20% respectively. Short end rates are likely to stay high, as liquidity is kept tight by the central bank.
The credit curve saw yields move up at the short end with one year CD (Certificate of Deposit) yield moving up 100bps week on week. Two year corporate bond yields moved up by 90 bps while five and ten year benchmark AAA corporate bond yields rose by 35bps and 5bps respectively. Ten year credit spreads came off as corporate bond yields turned sticky at higher levels. Ten year benchmark AAA credit spreads fell 15bps week on week to close at 130bps levels. Five year credit spreads were flat at 102bps levels. Credit spreads will move on the back of movements in government bond yields as corporate bond yields will stay steady at current levels of yields.
The OIS (Overnight Index Swaps) curve inverted by 49bps week on week as money market yields shot up. One year OIS yields rose by 70bps while five year OIS yields rose by 21bps to close at levels of 9.34% and 8.29% respectively. OIS yield curve will stay inverted on the back of high money market rates.
Liquidity eased last week as banks demand for funds in the reporting week came off. Banks were over covered on product leading to lower demand for funds. Liquidity as measured by bids for the LAF (Liquidity Adjustment Facility) auction of the RBI saw bids for repo averaging Rs 37,000 crores on a daily basis last week against an average of Rs 103,000 crores seen in the week previous to last. Bids for repo will stay under Rs 35,000 crores levels post RBI’s restriction on banks access to the repo window for funds. Banks can access the repo window up to 0.5% of their NDTL (Net Demand and Time Liabilities). Call money rates will trade at over 10% levels this week.