Rate hikes and tight liquidity
US Fed has hiked fund rate by 75 bps to 3%-3.25% as per market expectations in its last meeting with indications of more rate hikes in coming months to curb rising inflation. Policymakers have forecasted US GDP growth rate to stand at 1.2% and 1.7% in 2023 and 2024 respectively. Unemployment rate has been estimated at 4.4% in 2023.
Possible rate hike by RBI
In the current scenario of Fed rate hike, rising domestic inflation and depreciation of domestic currency, it is highly possible for RBI MPC to hike policy repo rate by 60 bps to 6% in its forthcoming policy meeting. Domestic currency has been depreciated rapidly to go beyond 81 level as a consequence of Fed rate hike and domestic inflation.
System Liquidity became negative
Domestic system liquidity has come down significantly touching deficit level in current economic scenario. As of 22nd Sep 2022, system liquidity stood surplus at Rs 266.20 billion after touching deficit level of Rs 118.86 billion as of 21st Sep 2022. The fall in system liquidity can be attributed to absorption of excess liquidity by central bank by USD selling. Going ahead, system liquidity is likely to remain volatile towards deficit level. �
Upcoming Government Borrowing calendar
By the end of next week, the Government borrowing calendar for H2FY23 is to be published by the RBI. The Union Government has borrowed a gross amount of Rs 7680 billion during H1FY23 (as of 23rd Sep 2022) out of total budgeted market borrowing at Rs 14950 billion for FY23. During the same period, the gross amount raised through SDL stood at Rs 2485.06 billion.
GoI Borrowing | Amount (Rs billion) | % of budgeted for FY23 |
H1FY23 | 7680 | 51.37% |
Government bonds, SDL and OIS yield movements
�New 10-year benchmark 7.26% 2032 yield rose by 16 bps to 7.39% while 6.54% 2032 yield increased by 16 bps to 7.43%. The 5-year benchmark bond, 6.79% 2027 yield rose by 18 bps to 7.37%. 3-year benchmark 5.22% 2025 yield rose by 19 bps to 7.22%. Long-term paper, 6.99% 2051 yield rose by 22 bps to 7.53%.
The spread of 10-year bond over 5-year bond declined to 2 bps from 4 bps as compared to the previous week. The 15-year benchmark over 10-year benchmark spread decreased to 11 bps from 13 bps while the 30-year benchmark over 10-year benchmark spread increased to 14 bps from 13 bps on a weekly basis.
Average 10-year SDL auction cut-off rose to 7.55% from 7.45% in previous week while spread came down to 26 bps from 35 bps (as benchmark g-se yield to 7.29% from 7.10% during the same period).
On a weekly basis, 1-year OIS yield soared by 32 bps 6.93% while the 5-year OIS yield rose by 38 bps to 6.99%.
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