Core CPI at 5.7% for January 2021
CPI inflation for January 2021 came in at 4.06% while core CPI, which is ex food and fuel, came in at 5.7%. Core CPI is showing broad based inflationary pressures, driven by high fuel and commodity prices and also supply constraints due to high demand for goods and services on the back of government spending. Inflationary pressures are on the higher side and this can hurt bond investors if yields stay low for a longer period of time.
RBI is struggling to manage government borrowing and keeping yields down
Last week, the government held 4 bond auctions, SDL auction for Rs 175billion where spreads rose to 8 month highs, special government bond auction for Rs 220 billion, where one single bidder determined the cut off yields, regular bond auction for Rs 260 billion that saw devolvement on underwriters and low demand for some bonds and an OMO purchase auction for Rs 200 billion, where RBI bought bonds in order to create space for banks and PDs to participate in bond auctions. RBI also cancelled the switch auction for bonds that was scheduled to be held this week, seeing the lack of demand in the market for longer end bonds.
Bond auctions are really heavy going into the end of the fiscal year and with prospects of heavy supply starting April, markets are just not willing to absorb bonds at low levels of yields.
How long will RBI try and protect yields is a big question now with rising core inflation, heavy supply and lack of demand.
Special Auction conducted on 11th Feb 2021
| 5.15% GS 2025 | 5.85% GS 2030 |
Notified Amount (Rs billion) | 110 | 110 |
Competitive Bids Received |
| |
Number | 201 | 165 |
Amount (Rs billion) | 346.21 | 237.91 |
Cut-off price | 98.38 | 99.09 |
Cut-off yield | 5.54% | 5.97% |
Competitive Bids Accepted |
| |
Number | 15 | 18 |
Amount (Rs billion) | 129.74 | 129.99 |
Partial Allotment Percentage of Competitive Bids | 88.33% | 44.32% |
4 bids | 1 bid | |
OMO Purchase of G-Secs
| 6.18% GS 2024 | 7.17% GS 2028 | 5.77% GS 2030 | 6.19% GS 2034 |
No. of offers received | 102.000 | 195 | 205.000 | 83.000 |
Total amount (face value) offered (Rs billion) | 123.110 | 431.46 | 253.340 | 84.430 |
No. of offers accepted | 24.000 | NIL | 158.000 | 46.000 |
Total offer amount (face value) accepted (Rs billion) | 20.400 | NA | 146.540 | 33.060 |
Cut off yield (%) | 5.178 | NA | 6.003 | 6.493 |
Cut off price | 103.350 | NA | 98.330 | 97.280 |
Weighted average yield (%) | 5.196 | NA | 6.044 | 6.518 |
Weighted average price | 103.290 | NA | 98.040 | 97.060 |
Partial allotment % of competitive offers at cut off price | 19.070 | NA | NA | NA |
IIP Data (Dec’20)-Domestic industrial output expanding 1% in December 2020 as compared to 1.9% contraction in November. Manufacturing output increased by 1.6% while mining production contracted by 4.8% during the month
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield came down by 8 bps to 5.99%. 5.77% 2030 yield declined by 7 bps to 6.06%. 5-year benchmark bond, 5.22% 2025 yield decreased by 2 bps to 5.43%. Long term paper 7.16% 2050 yield lost 2 bps to 6.68%.
The spread of 10-year bond over 5-year bond (5.22% 2025) came down by 6 bps to 56 bps from 62 bps in previous week. The 15-year benchmark over 10-year benchmark spread rose by 2 bps to 44 bps from 42 bps while 30-year benchmark over 10-year benchmark spread increased by 6 bps to 68 bps from 62 bps.
In the SDL auction conducted last week, average 10-year SDL yield rose to 7% from 6.89% from previous week. Consequently, the spread with G-sec benchmark increased to 93 bps from 76 bps.
On weekly basis, 1-year OIS yield came down by 3 bps to 3.77% while 5-year OIS yield rose by 10 bps to 5.09%.
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