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Fixed Income markets recovered somewhat last week with the rupee showing some signs of stability. A series of measures announced by the new Reserve Bank of India (RBI) governor Raghuram Rajan in his first press conference immediately after taking charges cheered the markets. A swap facility at a fixed rate of 3.5% for FCNR(B) deposits of maturity of three years or more for banks raised hopes of additional dollar flows of about $10bn. India also announced enhancing the bilateral swap arrangement with Japan to $50bn from $15bn at present. More impacting was perhaps the plan of BRICS countries to set up a fund of $100bn for restoring stability in currency markets. Equity indices also spurted sharply with the banking sector being the biggest gainer on reduced concerns. A general sense of the "worst is over" engulfed the market.
After a long while, the rupee appreciated for the week by a modest 0.70% on the back of these measures. With hedged one-year spreads of over 3%, moderate buying was also seen by debt FIIs in treasury bills and short-term corporate bonds. In anticipation of reversal of tightening measures by RBI as the rupee stabilised, money market rates came off sharply exemplified by cash management bill auction cut-off at 10.68% on Wednesday vs a cut-off of 11.74% on Tuesday. Three month bank certificates of deposit rates were down a whopping 125 bps to 10.55%. Government bonds rallied through the week to hit a low of 8.18% but gave up all the gains in closing session on Friday, to close flat at 8.63%, perhaps a bit apprehensive of all important non-farm payroll numbers and unemployment rate data to be announced in the US on Friday evening, the last of important data before the next Fed meeting. Otherwise, rates across the sub-segments like corporate bonds and five year government securities were down by 25-30bps.
This week as usual is full of domestic data including trade balance and inflation to be followed by Fed meeting and RBI's monetary policy review next week, the first under the new governor. While trade balance is expected to improve somewhat on lower gold imports, inflation print may still be higher. RBI did not announce any cash management bill auction for this week, perhaps keeping in mind the advance tax outflows. Markets will most likely find some stability on this count and short term rates may soften a bit more. Long bond yields may also recover somewhat after the sell-off on Friday as there is no scheduled auction this week and US data was slightly more favourable than expectations.
