Indian markets will respond more to domestic factors like tax-related outflows and liquidity conditions
Bond traders in Indian markets heaved a sigh of relief as the benchmark bond rallied after nearly a month-long carnage. The week that went by also witnessed some strong jaw-boning of an impending rate hike by the Federal Reserve (Fed) in its March meeting. A week that saw Dow Index scale to all-time high levels and breach of the 21000 mark, also saw the London FTSE scale new highs and India's NIFTY shying away from the key 9000 mark by a few points.
Indian bond traders finally found something to cheer about as strong short covering ahead of a 'shut-period' in the key benchmark 10-year bond saw yields sharply lower. The benchmark 6.97 2026 bond rallied and the yields fell 16 basis points from a high of 6.93, ignoring the reasonably well-correlated US 10-year yield movements. The UST 10y moved closer to 2.50% during the week from a low of 2.40% during the same time.
While a large part of the rally in the domestic debt markets could be attributed to short covering, arising out of value buying, the sentiment still continues to be weak. Market participants also were witness to a rare phenomenon in the interbank repo market where benchmark papers were repoed at rates as low as 0.01%. The resultant demand for cover led to steady demand for bonds and other securities also aligned with the benchmark curve. With rising probabilities of a Fed hike later this month, bond traders would prefer caution to aggression in the days ahead.
The week also saw release of Q3 GDP for India and it was a big surprise as the data showed real growth for Q3 registered a 7% increase and nominal growth was about 10%, above corresponding period in the previous year. While the surprise spurt in growth could be attributed to base effect (where nominal growth was less than 9% same period last year), the fears of faltering growth due to the November demonetization appears to fade as fiction. Private consumption and agriculture, were two key areas which strongly contributed to Q3 growth. One would however wait for Q4 and full year growth data to decisively conclude.
In a related development, M3 data released last week shows money supply is nearly at the pre-demonetization level and currency with public is also moving higher, by courtesy speedy remonetization. Putting the pieces together, a likely V shaped recovery could further dampen hopes of any near-term easing and rate markets may find any fall in benchmark yields as opportunity.
In overseas markets, Brexit worries pushed the pound to a six-week low, as US Dollar consolidated its gains. Trump's address to Congress was yet again short of specifics but promised to make America a great nation, like the campaign agenda. The thaw in protectionist rhetorics may buoy global markets in the days to come. Fed chair Yellen increased the prospects of a March hike with comments that recent strong data warranted an earlier than previously thought rate hike. While short term US yields responded to those comments the long ends came off post her statements.
The week ahead sees rate-setting meeting in Europe and China. US releases the February employment report which will be the last piece of critical data for the Federal Open Market Committee. Indian markets will respond more to domestic factors like tax-related outflows and liquidity conditions.
Forward looking events like inflation data release and borrowing calendar announcement will also get factored in. Range of 6.80-6.70 with a bullish bias.
The writer is executive director, Lakshmi Vilas Bank
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