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ShareThe RBI is likely to maintain status quo on the reverse repo, repo and cash reserve ratio rates. It is expected to evaluate the earlier policy actions of aggressive rate cuts on the economy. The RBI had cut policy rates to all-time lows against the backdrop of a severe slowdown in global economy and its negative implications on the domestic economy.
The scenario since April 2009, where the RBI had cut reverse repo and repo rates by 25 basis points, has changed considerably.
The world economy as well as the domestic economy is seemingly coming out of a deep slump, as suggested by asset and credit markets.
Equities, commodities, credit spreads and high-yielding currencies have rallied on improved sentiments. Incremental economic data is suggesting a slowdown in the contraction. However, economies have a long way to go before coming back to any semblance of growth.
The RBI is likely to show satisfaction in the progress of the economy on the back of fiscal and monetary actions. The monetary actions of reducing policy rates, maintaining high system liquidity and helping the government in managing its huge borrowing programme through purchase of bonds in the open market is in conjunction with the fiscal stimulus provided by the government.
The government has targeted a fiscal deficit of 6.8% of GDP for funding their stimulus programme. The RBI is also likely to caution on being complacent on economic growth on the back of weak aggregate demand, negative export growth and monsoon failure in several parts of the country. On the other side, the RBI will voice its concerns on fiscal deficit, higher inflation expectations on the back of rise in food and commodity prices and the repercussions on withdrawal of monetary accommodation.
Inflation as measured by the wholesale price index came in at negative 1.17% for the week ended July 11, 2009.
Liquidity, as measured by bids for reverse repo/ repo in the liquidity adjustment facility auction of the RBI remained high with bids for reverse repo crossing Rs 1,30,000 crore. Overnight rates were at 3% levels. Liquidity will continue to be high in the system, keeping overnight rates low.
Government bonds
Government bonds saw yields move up week-on-week as the market offloaded auction positions on the back of a rise in asset markets and global bond yields. The 10-year benchmark bond, the 6.90% 2019 bond, saw yields move up by 6bps to close the week at 6.92% levels. The five-year benchmark -- the 6.07% 2014 bond -- saw yields move up by 5bps, while the well-traded 7.94% 2021 bond saw yields move up by 11bps to close at 6.54% and 7.29% respectively. The long bond, or the 7.40% 2035 security, saw yields move up by 7bps to close at 7.80% levels.
The government auctioned Rs 12,000 crore of bonds last week.
The bonds auctioned were the 6.49% 2015 bond for Rs 6,000 crore and the 6.90% 2019 bond for Rs 6,000 crore. The cut-offs came in at market expectations of 6.73% and 6.92% respectively. The RBI purchased Rs 3,589 crore of bonds through open market operations last week. The bonds purchased were the 7.56% 2014 bond at a yield of 6.62%, the 6.35% 2020 bond at a yield of 7.07% and the 8.33% 2036 bond at a yield of 7.77%.
The government is auctioning Rs 12,000 crore of bonds this week. The bonds to be auctioned are the 6.07% 2014 bond for Rs 6,000 crore, the 7.94% 2021 bond for Rs 4,000 crore and the 8.24% 2027 bond for
Rs 2,000 crore.
Treasury bills, corporate bonds and overnight index swaps
Treasury bill (T-bill) yields were flat in the 91-day T-bill auction held last week, with the cut-off on the 91-day T-bill auction held on July 22, 2009 coming in at 3.28% against a similar cut-off seen in the previous auction.
The 182-day T-bill auction saw the cut-off coming in at 3.47% against a cut-off of 3.43% in the previous auction. The RBI is auctioning Rs 8,000 crore of 91-day T-bills and Rs 1,000 crore of 364-day T-bills this week.
Corporate bond yields were higher week-on-week on the back of higher government bond yields. Five-year benchmark bonds traded at 7.95% levels, up 5bps week-on-week, while 10-year benchmark bonds traded at 8.60% levels, up 6bps week-on-week. Five-year spreads closed flat at 130bps levels while 10-year spreads closed almost unchanged at 150ps levels.
Overnight index swaps (OIS) saw the curve move up week-on-week on the back of rise in global bond yields. The five-year OIS yield closed up 13bps at 6.33% levels while the one year OIS yield closed up 7bps at 4.15% levels. The OIS curve is likely to be range bound in the coming weeks.
Disclaimer: The author is head-fixed income, IDFC Mutual Fund. Views are personal.
