ECB lowering deposit rates by 10 bps to negative 50bps and announcing bond purchase program of Euro 20 billion a month will drive central banks across the world from US Fed onwards to cut rates to keep currencies competitive. Read our report on ECB policy for details.
The INR appreciated post ECB policy, as negative yields in the Eurozone will prompt markets to seek higher yields in EM bonds. India’s exports for the month of August 2019 fell 6.05% year on year while CPI inflation came in below expectations at 3.21%. RBI is likely to cut rates by 35bps in its policy review in October 2019 in the face of global central bank easing, weak trade data, low inflation and weak domestic demand. Auto sector leads the lack of demand in the economy and this will hurt growth expectations.
RBI is also expected to look to improve policy transmission by lowering the floor on overnight rates. Read our note on RBI lowering floor on overnight rates for details. The weak demand in the economy along with credit freeze for NBFCs and many corporate issuers and credit risk aversion among banks on rising defaults have hampered policy transmission through lower rates.
Money market securities yields and yields on short end of the curve government and corporate bonds will benefit from RBI policy expectations.
OIS yields rose on the back of sharp rise in UST yields (Read our note on Global Bonds for details) and will stay volatile given US-China trade war and Trump trying to influence Fed on rate cuts.
10 year government bond yield rose on the back of expectations of a new benchmark bond given that the outstanding on the 7.26% 2029 bond is Rs 1140 billion against an informal cap of Rs 1200 billion. The bond market is also worried about fiscal slippages on the back of weak economic growth that may lead to higher borrowings.
Liquidity is likely to see outflows on advance tax payments but will come back through government spending.
The 10-year benchmark government bond, the 7.26% 2029 bond, saw yields close 5 bps up at 6.64% on a weekly basis. The benchmark 5-year bond, the 7.32% 2024 bond saw yields down 3 bps at 6.2% and the 6.68% 2031 bond yield closed 8 bps up at 6.87%. The long bond, the 7.63% 2059 bond yield closed 2 bps at 7% levels.
One-year OIS yield closed up by 6 bps and five-year OIS yield closed up by 17 bps. One-year OIS yield closed at 5.08% while five-year OIS yield closed at 5.05%
System liquidity as measured by bids for Repo, Reverse Repo, Term Repo and Term Reverse Repo in the LAF (Liquidity Adjustment Facility) auctions of the RBI and drawdown from Standing Facility (MSF or Marginal Standing Facility) and MSS/CMB bond issuance was in surplus of Rs 1522 billion as of 13th September 2019. Liquidity was in a surplus of Rs 2157 billion as of 6th September 2019.
Weekly G-sec Curve Spread Analysis
- The yield curve steepened at the short end of the curve with 10-year G-sec yield rose by 5 bps . (Table 1)
- Long end off the run bond spreads with the 10-year G-sec remained steady last week
- On the 9th September 2019 auction, the spread between SDL with 10-year G-sec came in at 54 bps,states borrowed Rs 66 billion last week through SDLs auction. On 03rd September 2019 auction, the spread between SDLs with 10-year G-sec was at 64 bps. (Chart 1).