 "Short term rates to stabilise now: Jajoo")
Fixed income markets opened last week on a jittery note as the markets awaited future guidance from RBI’s monetary policy due on Tuesday even as traders largely expected a hike in repo rate by 25 bps and a cut in marginal standing facility rate by 25 bps. Participants also awaited guidance from the Fed meeting due later last week on likely pace of tapering. Benchmark 10-year government bond yields hit a high of 8.66% in nervous trading ahead of the policy. RBI reinforced its emphasis on consumer price inflation which has remained sticky around 10% in recent years by hiking repo rate by 25 bps to 7.75%. RBI also cut MSF rate by 25 bps to 8.75% and thereby completing the reversal of emergency measures of July. Further, it injected additional liquidity to the extent of 0.25% of NDTL of banks by way of 7/14 day term repos to support dwindling growth.
Immediately after the policy announcement, bond markets rallied with 10 year yields easing to 8.53% as RBI seemed to indicate that after the current hike, repo rate was now consistent with its growth and inflation projections and thereby implying a possible pause in next policy. The Fed maintained the current pace of bond purchases but the traders interpreted the stance to be less dovish than expected. In subsequent press and research analyst interactions, RBI continued to emphasis on CPI and thus reviving concerns on further possible rate hikes in case the inflation remains high. As RBI seemed non-committal on further rate hikes and open market operations, bond markets sold off by the weekend with government 10 year bond yields closing the week at 8.68%, the high point of the week.
Five-year AAA PSU bond yields eased marginally by 2 bps to 9.50% from 9.52% supported by MSF rate cut and enhanced liquidity measures announced in the policy. Ten-year AAA corporate bond yields ended 7 bps higher to 9.57% from 9.50% in line with government bonds. Buoyed by additional liquidity measures, three month bank certificates of deposit rates dropped 16 bps to 8.82%,,while one year bank CD rates remained flattish at 9.07%. With MSF balances coming further lower at Rs 8,900 crore from Rs 25,400 crore in previous week, the repo rate is set to become the operative rate shortly leaving room for further easing in short end of the money market curve.
With unwinding of emergency measures completed, short term rates are now expected to stabilise at current levels with some downward bias as liquidity improves further. Given higher supplies and possibility of further hike in repo rate, bond yields may continue to face upward pressure though the uptick will be capped by RBI intervention including by way of OMOs. Thus long term rates may for now remain range bound with an upward bias. This further amplifies the ongoing theme of the steepening in yield curve.
Mahendra Jajoo is Executive Director & CIO-Fixed Income at Pramerica Asset Managers
Immediately after the policy announcement, bond markets rallied with 10 year yields easing to 8.53% as RBI seemed to indicate that after the current hike, repo rate was now consistent with its growth and inflation projections and thereby implying a possible pause in next policy. The Fed maintained the current pace of bond purchases but the traders interpreted the stance to be less dovish than expected. In subsequent press and research analyst interactions, RBI continued to emphasis on CPI and thus reviving concerns on further possible rate hikes in case the inflation remains high. As RBI seemed non-committal on further rate hikes and open market operations, bond markets sold off by the weekend with government 10 year bond yields closing the week at 8.68%, the high point of the week.
Five-year AAA PSU bond yields eased marginally by 2 bps to 9.50% from 9.52% supported by MSF rate cut and enhanced liquidity measures announced in the policy. Ten-year AAA corporate bond yields ended 7 bps higher to 9.57% from 9.50% in line with government bonds. Buoyed by additional liquidity measures, three month bank certificates of deposit rates dropped 16 bps to 8.82%,,while one year bank CD rates remained flattish at 9.07%. With MSF balances coming further lower at Rs 8,900 crore from Rs 25,400 crore in previous week, the repo rate is set to become the operative rate shortly leaving room for further easing in short end of the money market curve.
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RBI has neatly resolved and equally well explained now the reconciliation between high CPI and slowing manufacturing inflation. While the need to support growth and revival of investment demand is met by lowering the short term rates, savings are being incentivized by hiking repo rate. Imminent introduction of long term CPI linked bonds is also a step in that direction.
With unwinding of emergency measures completed, short term rates are now expected to stabilise at current levels with some downward bias as liquidity improves further. Given higher supplies and possibility of further hike in repo rate, bond yields may continue to face upward pressure though the uptick will be capped by RBI intervention including by way of OMOs. Thus long term rates may for now remain range bound with an upward bias. This further amplifies the ongoing theme of the steepening in yield curve.
Mahendra Jajoo is Executive Director & CIO-Fixed Income at Pramerica Asset Managers