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ShareThe bond market is going with apprehension into the second quarter review of the annual monetary policy of the Reserve Bank of India (RBI) for 2009-10.The market, while not expecting any policy rate hikes, has taken up ten-year benchmark bond yields to close to 7.5% levels. The auction cut-off on the 6.90% 2019 bond, last week, came in at 7.48% up from 7.40% in the previous week.
The bond yield had gone down to levels of 7.33% mid-week as the market started to factor in status quo on policy rates and the possibility of a hike in the held-to-maturity (HTM) portfolio of banks.
However, the market received a jolt in the form of a statement from the finance ministry that the HTM hike may be considered only in March 2010. This statement dampened sentiments leading to higher cut-off yields in the auction.
The market largely expects the RBI to maintain status quo on key policy rates this week. The central bank is expected to leave reverse repo, repo and cash reserve ratio rates unchanged at 3.25%, 4.75% and 5%, respectively. The policy rates are at all-time lows with the RBI embarking on an accommodative policy in October 2008, on the back of threats to domestic growth and falling inflation expectation due to the contagion effects of the global financial crisis.
The situation is different a year later, with ultra loose fiscal and monetary policies of global economies taking economies back on an even keep, but at the same time exporting inflationary pressures to economies like India. High crude oil prices (currently at over $80/bbl), higher commodity prices and large flows of speculative money into higher yielding currencies is causing inflationary pressures on the economy. The RBI is concerned with speculative asset price bubbles and is showing signs of being in a hurry to remove policy accommodation at the earliest.
However, weak credit growth at around 11% and GDP growth at around 6.5% which is below 9% levels desired by the government, is restraining the central bank from acting too fast on withdrawing easy policy measures.
The RBI, if it does not hike policy rates this week, will sound hawkish enough on price and financial system stability for the market to start factoring in rate hikes by January 2010. If the RBI does hike policy rates, the market will start factoring in more rate hikes going forward. This would mean that bond yields do not have too much of positives for it to go down sharply, while there are enough negatives for it to rise from current levels.
Liquidity, as measured by bids for reverse repo/ repo in the LAF (Liquidity Adjustment Facility) auction of the RBI remained high with bids for reverse repo at over Rs 1,10,000 crore. Overnight rates were at 3% levels. They will move higher if RBI hikes policy rates.
Government bonds
Government bonds saw ten-year yields move up week on week as expectations of an HTM hike died down. The ten-year benchmark bond the 6.90% 2019 bond saw yields move up by 5 basis points (bps) to close the week at 7.45% levels. The new five-year benchmark bond, the 7.32% 2014 bond saw yields move down by 4 bps to close at 7.26% levels. The 6.35% 2020 bond saw yields close down 1 basis point at 7.86% levels, while the long bond the 8.24% 2027 bond saw yields end down 8 bps at 8.32% levels.
The government auctioned Rs 10,000 crore of bonds last week. The bonds auctioned were the 7.02% 2016 bond for Rs 3,000 crore, the 6.90% 2019 bond for Rs 4,000 crore and the 8.28% 2032 bond for Rs 3,000 crore. The cut-offs came in at 7.47%, 7.48% and 8.42% respectively.
Treasury bills, corporate bonds and overnight index swaps Treasury bills (T-bills) yields were flat in the 91-day T-bill auction held last week with the cut-off coming in at 3.23% against a similar cut-off seen in the previous auction.The 364 day T-bill auction saw cut-offs coming in at 4.54% as against a cut-off of 4.59% seen in the previous auction. Corporate bond yields were lower week on week on expectations that RBI will maintain status quo on rates in the policy review.
Overnight Index Swaps (OIS) saw the curve move down marginally week on week. The five-year OIS yield closed lower by 3 bps at 6.97% levels while the one year OIS yield closed lower by 3 bps at 4.95% levels.The one over five spread closed flat at 202 bps levels.
Disclaimer: The writer is head, fixed income, IDFC Mutual Fund. Views are personal.
