Government bond yields will come off from levels of 8.17% on the 8.15% 2022 bond on the back of OMO (Open Market Operations) announcement, GDP growth numbers and FII bond limit increase. RBI will carry out weekly bond purchase auctions for the next three weeks as advance tax outflows in mid December is expected to strain liquidity conditions. The bond purchases of the RBI will also help negate the expected increase in government borrowing. The government is expected to borrow an extra Rs 20,000 crores (this could go up to Rs 50,000 crores if fiscal deficit exceeds the projected 5.3% of GDP) for fiscal 2012-13.
RBI, last week, announced a bond purchase auction of Rs 12,000 crores to ease liquidity conditions. The OMO announcement helped bond yields, which were threatening to go up on deficit worries, to come off. The ten year benchmark bond, the 8.15% 2022 bond saw yields come off by 6bps week on week on the back of the OMO announcement.
India’s second quarter 2012-13 GDP growth came in at 5.3% against 5.5% growth seen in the first quarter of 2012-13 and against 6.7% growth seen in the second quarter of 2011-12. The weak GDP growth numbers suggest that India’s growth for 2012-13 will be around 5.5% to 5.8%, which is down from growth rate of 6.5% seen in 2011-12. GDP growth is seen to have bottomed out in the second quarter and is likely to trend higher from these levels. RBI will look at IIP growth numbers for October 2012 and inflation numbers for November 2012 while taking a policy decision on the 18th of December.
The government increased the FII limits for investment in government and corporate bonds by USD 10 billion to take the overall limit up to USD 75 billion. The government has created a new limit for government bonds where pension funds, central banks and sovereign wealth funds can invest in government bonds of any maturity up to a limit of USD 5 billion. The other USD 5 billion limit is for investments in corporate bonds and government bonds and this is open to all FII’s. The increase in FII investment limit for government and corporate bonds will boost bond market sentiments as higher limits are seen as creating extra demand for government bonds.
Corporate bond yields came off by around 5bps week on week on the back of OMO announcement. Five and ten year benchmark AAA corporate bond yields closed last week at levels of 9% each. Corporate bond yields are likely to trend down on the back of positive sentiments on government bond yields.
OIS (Overnight Index Swaps) market saw the curve shift down on the back of lower government bond yields. One and five year OIS yields fell by 5bps and 9bps week on week respectively. One year OIS yields are likely to fall faster than five year OIS yields as markets expect liquidity to ease on the back of OMO’s.
Liquidity as measured by the bids for repo in the LAF (Liquidity Adjustment Facility) auction of the RBI eased last week. Bids for repo averaged Rs 102,000 crores on a daily basis last week against an average of Rs 113,000 crores seen in the week previous to last. Liquidity eased on the back of lower demand for funds by banks in the reporting week. Liquidity is likely to ease further on the back of RBI bond purchase auctions.
Governmentbondauction
The government auctioned Rs 13,000 crores of bonds last week. The bonds auctioned were the 8.07% 2017 bond for Rs 3000 crores, the 8.33% 2026 bond for Rs 7000 crores and the 8.97% 2030 bond for Rs 3000 crores. The cut offs came in at 8.17%, 8.28% and 8.39% levels respectively. The government is scheduled to auction Rs 12,000 crores of bonds this week.