The success of covid vaccine in trials has given hopes for markets for an economic recovery with equity markets in India and globally touching record highs. The vaccines are expected to be available from early 2021.
Given the reliance on market borrowing by the government to fund its very high fiscal deficit, RBI has had to step in aggressively to buy long bonds to keep bond yields from moving up. 10 year government bond yields have largely stayed stable at around 5.80% levels, touching lows of 5.7% and highs of 6.2% since April 2020.
Despite the contracting in the economy in the first and second quarters of this fiscal year, inflation has trended higher to over 7% levels. Fuel prices have not dropped despite sharp fall in global oil prices as cash strapped governments have kept fuel prices high. Government spending on subsidies and rural economy has also pushed up inflation.
RBI has steadfastly been keeping rates and bond yields down despite rising inflation but with a vaccine relief, there will not be much of pressure to maintain low rates and RBI will have leeway to normalize rates. This will push up bond yields substantially higher before they settle down to general trading levels.
Forecast of domestic GDP growth & Inflation (source: RBI)
Parameter | Rate | period |
GDP growth | -9.50% | FY21 |
Inflation | 5.4%-4.5% | H2FY21 |
Government bonds, SDL and OIS yield movements.
During the week, the 5.77% 2030 yield remained unchanged at 5.88%, while 5.79% 2030 bond yield also stood unchanged at 5.90%. 6.45% 2029 bond yield came down by 2 bps to 5.94%. 5-year benchmark bond, 5.22% 2025, yield decreased by 5 bps to 5.06%. Long term paper 7.16% 2050 yield declined by 5 bps to 6.63%.
The spread of 10-year bond over 5-year bond (5.22% 2025) rose to 84 bps as compared to 79 bps previous week. The 15-year benchmark over 10-year benchmark spread decreased to 33 bps from 35 bps. 30-year benchmark over 10-year benchmark spread increased to 76 bps from 70 bps.
In the SDL auction conducted last week, average 10-year SDL yield remained stable at 6.55% as compared to 6.56% in previous week. Consequently, spread with G-sec benchmark remained stable at 65 bps.
On weekly basis, 1-year OIS yield declined by 3 bps to 3.58% while 5-year OIS yield decreased by 2 bps to 4.35%.