The bond market will be hopeful of a repo rate cut in RBI 18th December 2012 mid quarter policy review given the fall in inflation for November 2012 and on the back of government reforms. Inflation as measured by the WPI (Wholesale Price Index) came in at 7.24% for November 2012 against levels of 7.45% seen in October 2012. The fall in inflation was not expected by the market, which was factoring in higher inflation for November.
Manufacturing inflation for November came in at 5.41% against 5.95% seen in October. The fall in manufacturing inflation is positive for bond markets as the RBI sees it as a core inflation indicator.
The lower inflation partially offsets a sharp rise in IIP (Index of Industrial Production) growth for October 2012. IIP growth came in at 8.2% levels for October against a negative 0.4% growth seen in September. IIP growth was boosted by inventory stocking for Diwali and by the low base effect as IIP growth was a negative 5% in October 2011. RBI may see the rise in IIP as a blip and will expect IIP growth to come off in November as manufacturers ease production for inventories to get cleared.
The government pushed through a key bill in the parliament on allowing FDI in retail. The government is also committing itself to fiscal consolidation measures and is hopeful of sticking to its borrowing schedule for 2012-13. The lowering of spectrum fees will help the auction of spectrum leading to more revenues for the government. The government is also committed to sticking to its tax collection growth of 15% for fiscal 2012-13 despite tax growth at just 7% in the April-November 2012 period. RBI will take a note of the governments efforts on fiscal consolidation in its December policy review.
Bond yields fell week on week with the ten year benchmark bond the 8.15% 2022 bond yield dropping by 2bps to close at 8.14% levels. Ten year bond yields will trend down on the back of rate cut this week or on rate cut expectations for January even if there is no rate cut in December. RBI buying of bonds through OMOs (Open Market Operations) is also helping the market as floating stock gets taken out of the system. RBI has bought Rs 23,245 crores of bonds through purchase auctions in the last two weeks and is expected to hold one more auction for Rs 12,000 crores this week to infuse liquidity into the system.
Liquidity as measured by the bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI was steady last week. Bids for repo averaged Rs 92,000 crores on a daily basis last week against an average of Rs 93000 crores seen in the week previous to last. Advance tax outflows will tighten liquidity this week and bids for repo are likely to be above Rs 100,000 crores.
Corporate bond yields were largely unchanged week on week with five and ten year benchmark AAA corporate bond yields trading flat at around 8.95% to 8.98% levels. Corporate bond yields are likely to trend down on positive rate cut sentiments.
OIS (Overnight Index Swaps) market saw the curve flatten by 5bps week on week with one year OIS yields coming off by 2bps and five year OIS yields rising by 3bps. OIS yield curve will see flattening on rate cuts and bond purchases by the RBI. The five over one spread, which is inverted at present, will see the inversion come off sharply in the coming weeks.
Governmentbondauction
The government did not hold any bond auctions last week and is scheduled to hold an Rs 12,000 crore auction this week. State governments are auctioning Rs 9700 crores of loans this week.