Synopsis: Surging commodity prices is being felt in the real economy but RBI is holding bond yields down to support the covid hit economy.
Commodity prices have surged over the last one year and this is being felt at all levels in the economy. This can lead to CPI inflation printing higher and higher going forward as input costs rise across industries leading to higher retail prices.
Commodity Price | 1-year change (%) |
Copper | 87% |
Aluminium | 64% |
Zinc | 51% |
Nickel | 45% |
Steel | 115% |
Brent Crude | 164% |
Higher commodity prices would add additional pressure on inflation since the end-user products get expensive due to higher input costs. Corporate earnings are witnessing the deterioration of operating margins because of higher raw material prices. Automakers have already passed on higher costs to end-users, but weaker demand coupled with higher prices is stalling growth. FMCG companies & Agri-chemical have also expressed pressures of higher costs which is dampening the sales growth.
Along with surging commodity prices is the covid 19 crises that is hitting the country. Record high daily cases with rising mortality and shortage of hospital beds, oxygen cylinders and medicine is forcing lockdowns across states, hurting manufacturing and service sectors. This can lead to sharp fall in economic growth expectations as well as fall in tax revenues that will strain government fiscal position that is already high at budgeted 6.8% of GDP.
April saw record gst collection of Rs 1.4 trillion despite lockdown but collections could fall on weak demand. However, higher commodity prices aid in gst revenues as base for gst is higher in many products.
Government bond auction goes through smoothly after hiccups in the previous auctions
The bond auction for Rs 260 billion held last week saw the RBI accepting all bids in the auction unlike in the previous 2 auctions where the central bank rejected all bids for a couple of bonds including the benchmark 10 year bond. The cut off on the 5.85% 2030 bond came in at 6.05% and it will be trading at current levels for a while, as RBI is keeping a tight lid on yields.
Government bonds, SDL and OIS yield movements.
During the week, 5.85% 2030 yield declined by 1 bps to 6.03%. 5.77% 2030 yield decreased by 5 bps to 6.19%. 5-year benchmark bond, 5.22% 2025 yield was unchanged at 5.38%. 6.57% 2033 yield lost 5 bps to 6.56% while the long term paper 7.16% 2050 yield came down by 3 bps to 6.81%.
The spread of 10-year bond over 5-year bond (5.22% 2025) was stable at 65 bps from 66 bps in previous week. The 15-year benchmark over 10-year benchmark spread declined to 53 bps from 57 bps while 30-year benchmark over 10-year benchmark spread came down to 77 bps from 79 bp.
In the SDL auction conducted last week, average 10-year SDL yield came down to 6.78% from 6.83% seen in the previous week. Consequently, spread with G-sec benchmark came down to 73 bps from 75 bps.
On weekly basis, 1-year OIS yield was unchanged at 3.75% while 5-year OIS yield rose by 11 bps to 5.18%.
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