 "Bond markets await RBI policy: Jajoo")
The central theme for the bond market last week remained a sharp spike in November consumer price inflation to 11.24% followed by a fairly muted response from Reserve Bank of India wherein it tried to talk up sentiments by providing hopes of open market operations to support growth while at the same time re-emphasising its undivided attention on raging inflation.
Bond markets began the week on a positive note buoyed by BJP’s victory in four state elections and a strong opening of rupee. The benchmark 10-year bond touched an intra-week low of 8.79% as the rupee touched 60. Thereafter a news flash on a likely debt swap by the government effectively enhancing supplies of long term bonds by Rs 50,000 crore during rest of the year resulted in a sharp spike in bond yields with 10-year benchmark galloping to 8.93%.
Even though trade deficit for November came lower at $9.22 bn effectively implying a full year current account deficit well below $50 bn, RBI’s comments on need to improve the quality of CAD did not allow much cheer to traders. Both Moody’s and Fitch also hinted at possibility of downgrade in case of political uncertainty and a slippage in fiscal deficit. Globally, the US saw a smooth passage of debt deal thus averting possibility of another shutdown and with economic data coming in stronger than expected, hopes of an early fed taper remained strong. The US 10-year treasuries retested their recent highs of 2.90%.
In order to meet the seasonal advance tax payment outflows, RBI announced an additional Rs 10,000 crore 14-day term repo window. Even then, liquidity tightened somewhat as liquidity adjustment facility balances stood at Rs 25,500 crore from Rs 7,900 crore, while Rs 48,000 crore was utilised from 14-day term repo window at cut off rate of 8.01%. Extreme short end remained well anchored as three month bank certificates of deposit yields eased 19 basis points to 8.70% from 8.89%. One-year bank CD rates though inched up 25 bps from 9.05% to 9.30% led by higher issuances and overall sentiment driven sell off.
Even in the face of a shockingly high CPI number, RBI delivered a fairly muted response talking about the need to balance growth and inflation and thereby leaving the market somewhat tentative. While a section of the market is debating a repo hike of 25 vs 50 bps, others do not rule out a possibility of a pause in view of a flat core CPI and poor growth. Markets will now keenly await the rate action and the guidance at the monetary review this week. Bond yields generally are pricing in a 25 bps hike and therefore the guidance will dictate the market response. A slowdown in government expenditure will also possibly result in tighter liquidity in coming weeks as it holds back the cash collected from taxes. This could put further pressure on short term rates. Notwithstanding a softer guidance from RBI, yields may remain elevated till some relief emerges on inflation and fiscal deficit. More measures to control inflation may lead to further sell off, while a more growth supportive stance from RBI may allow some consolidation.
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers
Bond markets began the week on a positive note buoyed by BJP’s victory in four state elections and a strong opening of rupee. The benchmark 10-year bond touched an intra-week low of 8.79% as the rupee touched 60. Thereafter a news flash on a likely debt swap by the government effectively enhancing supplies of long term bonds by Rs 50,000 crore during rest of the year resulted in a sharp spike in bond yields with 10-year benchmark galloping to 8.93%.
Even though trade deficit for November came lower at $9.22 bn effectively implying a full year current account deficit well below $50 bn, RBI’s comments on need to improve the quality of CAD did not allow much cheer to traders. Both Moody’s and Fitch also hinted at possibility of downgrade in case of political uncertainty and a slippage in fiscal deficit. Globally, the US saw a smooth passage of debt deal thus averting possibility of another shutdown and with economic data coming in stronger than expected, hopes of an early fed taper remained strong. The US 10-year treasuries retested their recent highs of 2.90%.
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Back home CPI for November was reported at a shocking 11.24% YoY (well above consensus estimate of 10%) driven by 61.6% YOY spike in vegetable prices. However, there was some relief from a flat core CPI at 8%. IIP growth for October at -1.8% YoY came largely in line with expectation as manufacturing sector growth plummeted to -2.0% YoY. Post the release of these data, RBI reassured OMO support depending on economy needs. The rupee ended at 62.12 while 10-year bonds retested their weekly high before ending at 8.91% as the finance minister vowed to cut government expenditure by at least Rs 70,000 crore during the remaining fiscal to reign in the fiscal deficit. 10-year AAA corporate bond yields rose 6 bps to 9.63% from 9.57%, while five-year AAA yields rose 10 bps to 9.75% from 9.65%.
In order to meet the seasonal advance tax payment outflows, RBI announced an additional Rs 10,000 crore 14-day term repo window. Even then, liquidity tightened somewhat as liquidity adjustment facility balances stood at Rs 25,500 crore from Rs 7,900 crore, while Rs 48,000 crore was utilised from 14-day term repo window at cut off rate of 8.01%. Extreme short end remained well anchored as three month bank certificates of deposit yields eased 19 basis points to 8.70% from 8.89%. One-year bank CD rates though inched up 25 bps from 9.05% to 9.30% led by higher issuances and overall sentiment driven sell off.
Even in the face of a shockingly high CPI number, RBI delivered a fairly muted response talking about the need to balance growth and inflation and thereby leaving the market somewhat tentative. While a section of the market is debating a repo hike of 25 vs 50 bps, others do not rule out a possibility of a pause in view of a flat core CPI and poor growth. Markets will now keenly await the rate action and the guidance at the monetary review this week. Bond yields generally are pricing in a 25 bps hike and therefore the guidance will dictate the market response. A slowdown in government expenditure will also possibly result in tighter liquidity in coming weeks as it holds back the cash collected from taxes. This could put further pressure on short term rates. Notwithstanding a softer guidance from RBI, yields may remain elevated till some relief emerges on inflation and fiscal deficit. More measures to control inflation may lead to further sell off, while a more growth supportive stance from RBI may allow some consolidation.
Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers