24 Oct 2022

Repo rate most likely at 7% in the next 6 months

The sharp rise in 1 year OIS yield and 364 day T-bill yield to 7% levels suggest that RBI will hike the repo rate to 7% in the next 6 months to control inflation and prevent further INR depreciation and also maintain market stability in the face of a global bond crisis.

author dp
Team INRBonds
Share via:LinkedIn LogoTwitter logo

Driven by tight monetary policy by the RBI, systemic liquidity has declined sharply to deficit in the last one year. As of 20th October 2022, systemic liquidity stood at a deficit of Rs 460 billion as compared to Rs 7644 billion of surplus as of 13th Oct 2021. Owing to global rate hikes and elevated inflation, domestic currency has been depreciated sharply. RBI has been selling USD to protect INR. Consequently, systemic liquidity is being absorbed and has entered a deficit zone.

 Owing to sharp fall in systemic liquidity, money market instruments such as T-bills, commercial papers and OIS yield has soared since last one year.

It can be seen from the data that HDFC issued 1-year CP at 7.75% while the level was at 4.29% a year ago. On an average basis, 1-year CP yield rose to 7.75% from 4.25% since Sep-21.

In the same line, treasury bill yield has also moved up sharply during last one year. As of 21st October 2022, 364 D T-bill yield stood at 6.94% from 3.75% as of 1st October 2021.

OIS rate has also increased sharply due to liquidity crunch. 1-year OIS yield rose to 7.07% as of 21st Oct 2022 from 4.01% as of 01st October 2021 while 5-year OIS yield soared to 7.07% from 5.33% during the same period.

Government bonds, SDL and OIS yield movements

10-year benchmark 7.26% 2032 yield rose by 4 bps to 7.51% while 6.54% 2032 yield rose by 3 bps to 7.54%. The 5-year benchmark bond, 6.79% 2027 yield increased by 6 bps to 7.48%. 3-year benchmark 5.22% 2025 yield decreased by 8 bps to 7.24%. Long-term paper, 6.99% 2051 yield rose by 2 bps to 7.64%. 40-year paper, 7.40% 2062 yield increased by 4 bps to 7.64%.

The spread of 10-year bond over 5-year bond declined to 3 bps from 5 bps as compared to the previous week. The 15-year benchmark over 10-year benchmark spread came down to 7 bps from 10 bps while the 30-year benchmark over 10-year benchmark spread decreased to 13 bps from 15 bps on a weekly basis.

Average 10-year SDL auction cut-off declined to 7.74% from 7.85% in previous week while spread declined to 32 bps from 39 bps.

On a weekly basis, 1-year OIS yield declined by 7 bps 7.07% while the 5-year OIS yield increased by 4 bps to 7.07%.

We would love to hear back from you. Please Click here to share your valuable feedback