The first 3 years
Shaktikanta Das was appointed by the government as governor on the sudden resignation by Dr. Urjit Patel. The new governor had to address an economy coming out of the after effects of demonetization. Even as the RBI was taking steps to address the slowing economy, Covid struck and decisive action was the need of the hour. RBI cut rates to record lows and infused high liquidity and eased liquidity crisis for banks and NBFCs. All this helped the economy get back on track. Sensex and Nifty rose 70%, 10 year gsec yields fell by 140bps while INR weakened even as fx reserves rose by 60%. The only constant was core inflation that rose back to levels from where it came from at around 6%.
The next 3 years
Going forward, with the economy gaining traction, balance sheets of lenders and corporates looking healthier on improved equity markets and rising cash flows, government finance actually looking good with fiscal deficit at just 35% of budget for April-September 2021 period on strong tax collection and inflation staying sticky and threatening to rise on global and domestic factors, RBI may have to reverse policy rates and keep out excesses from the system.
Baby steps have been taken with liquidity calibration by stopping government bond purchases and sterilizing liquidity through term reverse repos. However, raising rates will require a stronger will especially if economic recovery falters.
Bond markets are starting to factor in higher inflation and interest rates with 10 year government bond yields rising by 60bps from lows over the last one year and 5 year OIS yields rising by over 100bps. This trend is likely to continue if inflation numbers start to rise to uncomfortable levels.
Bond investors will have to balance current low rates with expectations of higher rates over the next 3 years.
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Fiscal Deficit-Apr-SepFY22
During Apr-Sep FY2022, India�s fiscal deficit stood at Rs 5.27 trillion which is equivalent to 35% of full year budgeted target of FY22.
Government bonds, SDL and OIS yield movements
During last week, 6.10% 2031 yield rose by 3 bps to 6.39% while 5.85% 2030 yield increased by 2 bps to 6.34%. 5-year benchmark bond, 5.63% 2026 yield rose by 3 bps to 5.76%. 6.64% 2035 yield rose by 1 bps to 6.86%. 6.57% 2033 yield remained unchanged at 6.73%. Long-term paper, 7.16% 2050 yield came down by 4 bps to 7.08%.
The spread of 10-year bond over 5-year bond rose to 63 bps from 62 bps in previous week.� The 15-year benchmark over 10-year benchmark spread decreased to 34 bps from 38 bps, while 30-year benchmark over 10-year benchmark spread declined to 66 bps to 71 bps on weekly basis.
Average 10-year SDL auction cut-off came down to 6.96% from 6.99% in previous week while spread remained unchanged at 60 bps in previous week.
On weekly basis, 1-year OIS yield rose by 13 bps to 4.32% while 5-year OIS yield increased by 10 bps to 5.67%.
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