INR fell to record lows against the USD last week and RBI had to sell USD to support the INR from falling too fast. Record government borrowing, high inflation and rising global bond yields are driving money out of risk assets. A weak INR with high inflation will force RBI to raise interest rates sharply higher and this can take up 10-year G-sec yield to over 8% levels.
US, Eurozone and India CPI inflation are at 8.5%, 7.5% and 7% respectively while 10-year bond yields are at 2.9%, 1% and 7.15%. The Fed and the ECB have a lot of catching up to do on Inflation as they are far behind the curve while RBI is in a better position. This is a strong point for inflows into G-secs.
USD rose as high inflation supported the expectation that the Federal Reserve will hike rates more aggressively, possibly with a 50-bps rate hike in May and another in June. This comes after a 25-basis point rate hike in March. India's CPI inflation rose to 6.95% in the month of March which is higher than the 6.07% reported in February.
High and rising inflation expectations, heavy borrowing by government, ultra-low policy rates, all point to a longish rising interest rate cycle where RBI will have to continuously raise rates to bring policy to even neutral levels. Bond markets will play for rising bond yields and investors will have to position their investments for higher interest rates and inflation.
Owing to outcomes of RBI MPC meeting last week, government bond yields soared on multiple market worries. Although the central bank kept repo rate unchanged, it indicated rate hikes in coming months with withdrawal of excess liquidity. RBI’s stance on monetary policy will turn to hawkish from current accommodative..
USD traded higher last week by 1.18% against major world currencies as it was supported by the hawkish federal reserve stance and by robust US service sector data. INR pared losses on Friday when the RBI governor mentioned the intention of withdrawing the accommodative stance.
USD ended the week lower by 0.16% against major peers despite the release of robust U.S. jobs data. Oil prices fell sharply after the US mulled over the possibility of a record release of strategic oil reserves (SPR). Falling oil prices are helping INR to gain ground
USD trades higher last week after Federal Reserve officials have been out in force supporting a more hawkish stance from the US central bank in order to tame elevated inflation. US economic data was also upbeat boosting demand for the USD. INR falls amid elevated oil prices
Market awaits Government borrowing calendar for H1FY23 to be notified by RBI, which will guide direction of g-sec yield movements in coming days. While record amount of Rs 14950 billion as gross borrowing has been budgeted for FY23, around 60% is expected to be borrowed during H1FY23.
USD ended the week higher following the release of US inflation data. The data showed that the cost of living in the US jumped to a fresh 40 year high of 7.9%. This was up from 7.5% recorded in January. INR edges lower as near tern inflation expectations eased, however, this is likely to be short-lived.
In the first half of fiscal 20221-22, RBI held g-sec yields from rising as it coerced markets to absorb government bond supply at lower yields. G-sec yields then started rising in the second half and is at its highest levels at the end of the fiscal year, leaving investors with high losses due to rising yields.
The Fed chair, Jerome Powell, testified last week that rates will start to rise this month, but pace of rate hikes will be slow given the Russia & Ukraine crisis. With inflation at 4-decade highs and interest rates at all time lows, Fed is treading thin waters as commodity prices are surging and US labour markets are very tight leading to high wage growth. Other central banks are facing similar situation and markets are starting to doubt their ability to handle the current crisis.
Safe-haven flows are lifting the USD as the Russian invasion into Ukraine deepens. As well as safe-haven demand the USD is also being supported by strong data and by expectations of the Fed hiking rates this month. INR continues its last-week fall as risk aversion continues to dominate global financial markets.
GOI FRBs should ideally perform well when interest rates are rising but the prices have actually fallen over the last one year. This is due to the absolute yields staying very low as RBI has kept rates low and is continuing its accommodative policy.
USD traded higher last week amid safe-haven flows and further being boosted by upbeat economic data. In the central bank's latest monetary policy report to Congress, the Fed warned inflation could last longer than anticipated should labor shortages and fast-rising wages continue. INR falls as oil prices rise over USD 100 a barrel.
USD ended marginally lower as risk sentiment improved on Friday by the news that the U.S. and Russia were set to discuss the Ukraine crisis next week, raising hopes for a diplomatic solution. Additionally, the minutes from the January Federal Reserve monetary policy meeting were also less hawkish than what was expected, which sent USD lower.
Multiple fears gripped bond markets with the government announcing record borrowing in its budget for fiscal 2022-23. Along with record borrowing, Fed rate hikes. Surging oil prices and inflation are unnerving bond markets and RBI needs to address all these concerns in its policy this week.
USD ended the week sharply lower in nearly two years, as the Bank of England (BOE) and European Central Bank (ECB) tightened their monetary policies. Job growth rose far more than expected in January despite surging omicron cases driving 10yr UST yields higher by 11 bps to 1.93% on Friday.
Given expected growth of 13% in fiscal 2022-23 and a fiscal deficit pegged at 6% of GDP, net government borrowing is likely to be at around Rs 7 trillion. Coupled with state government borrowing the supply will still be heavy and RBI will be hard pressed to manage the borrowing if inflation continues to rise.
USD ended the week higher tracing UST yield movement as it touched 1.87% levels during the week amid expectation of a rate hike in March by the Fed. INR ended the week lower amid broad strength exhibited by the USD during the week and as oil prices continue to be at elevated levels.
Fed is sounding alarm on inflation, and this is causing fall in Sensex and Nifty and also rise in gsec yields. INR is also under pressure on FII sales and RBI is likely to raise rates this year even as government increases spending in its budget 2022-23. Bond ladders are the best strategy for investors looking to navigate weakness in equities and rising interest rates.
USD ended the week higher tracing UST yield movement as it touches 1.87% levels during the week amid expectation of a rate hike in March by the Fed. INR ended the week lower amid broad strength exhibited by the USD during the week and as oil prices continue to be at elevated levels.
RBI devolved around 15% of the Rs 130 billion 5 year auction on to the underwriters at over 2 year high levels of 6.07% in the bond auction held last week. Bond markets are nervous on union budget due to rising oil prices and are losing appetite for bonds.
USD ended marginally higher last week after hawkish minutes from the Fed's Dec meeting, released on Thursday, firmed up the expectations that the US central bank could raise interest rates at a faster pace this year. INR ended the week marginally higher after gaining sharply on Friday as USD exihibited broad weakness.
10 year G-sec yield has risen in the year 2021 and has underperformed equities by over 20%. INR has largely remained steady in a Rs 74 to Rs 76 band. Outlook for gsecs is still negative given policy normalisation by central banks amid rising global inflation that threatens to be structural in nature.
USD fell last week amid growing optimism for the global economic outlook despite the surge of Omicron-variant Covid cases. Further, the positive development on the vaccines front boosted the investors' appetite for risk, lifting stocks and pushing U.S. Treasury yields higher.
USD ended the week higher amid talk of interest rate hikes by central banks and concerns about the spread of Omicron cases. Key central banks have adopted different policies as uncertainty about the omicron COVID-19 variant’s impact on economic recovery remains. The Bank of England (BOE), and the European Central Bank (ECB) adopt a hawkish stance.
Fed, BOE and ECB are starting to turn wary of structural high inflation taking hold of economies and are acting accordingly despite Omicron fears on the economy. Gsec yields are trending higher and will stay higher on rising interest rate risk premium.
USD exihibited high volatility during the week amid increased restrictions in parts of the world to contain the spread of COVID-19, including the new Omicron variant, which tempered investors' appetite for riskier currencies. However, with Omicron concerns easing and inflation at a multi-decade high level, the Fed and the timing of the first-rate hike is back in focus.
Inflation is surging across the world but interest rates are at zero percent levels or even negative in many countries. Central banks have lost the will to fight inflation and are instead watching asset prices move higher and add to inflation expectations. High yield credits benefit while government bonds are at high risk of price erosion.
USD posted its biggest weekly gain in almost three months after a surprisingly strong U.S. inflation data, which prompted market participants to advance their bets for a U.S rate hike. UST yield in tandem with USD rose sharply.
USD declined last week despite a steady rise in bond yields, which normally tends to support the currency . The yield on the benchmark 10-year UST has risen by 10 basis points in the course of the week to 1.67%, on fears that this year’s spike in inflation is likely to last longer than first thought.
10-year gsec yields closed at one-year highs last week despite CPI inflation printing at 4.35% for September, after staying well over 5% and 6% levels for a while. Markets are factoring higher inflation with economic recovery and less need for protection of yields by RBI
RBI stopped Gsec purchases in its policy review last week, pushing up yields on government bonds. Gsec yields have been held artificially low by RBI through its bond purchases and market interference and the stopping of G-SAP program will help bond yields normalise to market driven levels.
USD traded higher last week tracing higher UST yields but fell in the later part of the week following an agreement in Washington over the US debt ceiling and amid a huge miss in the US non-farm payroll report. INR ended the week lower as the RBI kept monetary policy unchanged.
USD ended the week higher as it traced treasury yields amid expectations that the Fed could start tightening monetary policy sooner than its peers as inflation remained stubbornly high. INR ended the week lower due to the soaring crude oil prices fueling global inflation.
USD & UST yields rose last week as the U.S. Federal Reserve hinted at an earlier-than-expected rate hike. INR ended lower amid broad USD strength and as the Asian Development Bank unnerved investors with a warning on Asia’s economic recovery.
RBI recently stated that the inflation trajectory is shifting down more favorably than initially anticipated. As supply conditions return to normal and productivity gains the bank expects sustained decline in core inflation. This will allow the RBI to maintain its accommodative stance.
The auction of the new 14-year bond maturing in 2035 saw 3x demand for the Rs 100 billion of bonds on offer and the yield cut-off came in bullish at 6.67%. Has the sentiment turned for long-end g-secs that were trading at higher levels for the past many months?
USD exhibited broad weakness last week after a much weaker than expected U.S. payrolls report that is likely to keep the Federal Reserve at bay in scaling back its massive stimulus measures. INR traded higher last week amid broad USD weakness and as data revealed that the service sector in the Indian economy grew at the fastest pace since the pandemic began.
Fed is going to keep rates down for extended period of time and this is causing asset prices to rise substantially to bubble territory. RBI has plenty to do to manage growth, inflation, capital flows and potential market collapse like in 2008 credit crisis.
RBI is now becoming the single largest buyer of government bonds and has bought over Rs 1.5 trillion of bonds till date. However, bond yields have risen as RBI funding government fiscal deficit is seen as inflationary in nature.
USD and UST yields rose after hawkish comments made by Fed official Richard Clarida and better-than-expected monthly jobs report. INR edged higher largely boosted by an upbeat domestic equity market and inflows towards initial public offerings.
US monthly jobs data came in much better than expected and average hourly earnings rose to 4% from 3.7% as employers were forced to hike wages to attract new workers amid a dearth in labor supply. The trend of rising wages is expected to continue and could keep inflation higher for longer.
Administered pricing of G-secs like small savings rates or even fuel and agri commodities leads to lack of market confidence. RBI needs to let the market determine the yields on benchmark bonds while it goes about setting its policy stance and buying bonds.
10-year benchmark bond, 6.10% 2031 bond, yield rose by 3bps to 6.16% while the 6.57% 2033 bond yield came off sharply by 23bps to 6.65%. The market is starting to play yield curve spreads and this will continue going forward.
USD ended higher for the second consecutive week after a turbulent few days with currencies turning volatile. INR appreciated on firm equity markets following a rebound in risk sentiments and high foreign fund inflows in the primary market.
USD gained while UST and other global benchmark bond yields fell last week on a safe haven demand amid rising Covid-19 cases worldwide. INR showed some resilience against the surging USD last week as better than expected retail inflation helped to calm investors.
USD fell last week amid mixed messages in the FOMC minutes. The benchmark 10-year Treasury yield fell by 7 bps to fresh 4 month lows. INR ended the week marginally higher snapping a 6-weeks losing run despite being under pressure throughout the week amid the release of weak economic data and surging oil prices.
G-sec and SDL yields have moved up sharply from lows in the last one month on market’s fear of inflation and government fiscal deficit. RBI has tried to keep yields optically stable by focusing on benchmark bonds but other parts of the yield curve are cracking.
USD rose across the board last week. U.S. monthly jobs report indicated that the labor market recovery is on the right track but not picking up so fast so as to prompt a sooner move by the Fed. U.S. 10-year treasury yield fell sharply by 9 bps and is currently at 1.43%. INR fell despite exports & foreign exchange reserves hitting record levels
Synopsis: Latest fiscal stimulus will improve the creditworthiness of corporates that are struggling with covid lockdowns but will also pull up inflation. Corporate bonds trading at higher yields can be attractive while gsecs, psu bonds, and AAA corporate bonds may see a rise in yields on inflation.
USD fell last week following dovish commentary from Federal Reserve Chair Jerome Powell. INR fell against USD last week as oil prices hit fresh multi-year highs as the demand outlook continued to improve. S&P Global Ratings cut India’s growth forecast for the current fiscal year to 9.5%.
USD jumped last week against all of the major world currencies and the US 10 year benchmark bond yields posted their biggest one-day rise in three months on Wednesday. The Fed pointed to an improved economic outlook as the reason for accelerating the path to monetary policy normalization.
INR depreciated by 0.75% against the USD to touch multi month lows. Factors like surge in covid cases, rise in inflation and rise in oil prices have driven the INR to depreciate. Fear of economic disruption due to lockdown is looming on the back of second wave of corona pandemic.
RBI monetary policy meeting in the 1st week of April 2021 gains significance as it has to manage a huge government borrowing and also temper fast rising inflation expectations even as covid cases are surging. Will RBI hike rates soon?
High government borrowing can cut private sector access to capital making India’s vision of a USD 5 trillion economy not achievable. Individual savings can help absorb the borrowing through realisation of the Gsec market. Reading time- 3 minutes
Rising inflation expectations, spiking UST yields and high government borrowing have taken up bond yields by 40bps to 80bps across the curve. A rate hike in April will send positive signals to the market that RBI is staying on top of inflation. Reading time 4 min
USD climbed last week, lifted by a sharp rise in U.S. Treasury yields, while riskier currencies were hit hard amid fears that central banks will have to tighten sooner than previously expected. The yield on the US 10 year treasury closed at 1.41%, its highest level since the start of the pandemic.
USD climbed last week, lifted by a sharp rise in U.S. Treasury yields, while riskier currencies were hit hard amid fears that central banks will have to tighten sooner than previously expected. The yield on the US 10 year treasury closed at 1.41%, its highest level since the start of the pandemic.
Bond markets are increasingly worried about the inflationary effects of fiscal pump-priming by governments and ultra-loose monetary policy by central banks across the globe. Normally, governments want to borrow and spend and are not worried about inflation while central banks act against government-driven inflation. However, due to the covid pandemic, central banks are encouraging governments to borrow and spend and also want inflation to rise.
US 10 year Treasury yield rose to the highest level in a year this week to 1.34% amid concerns about the possibility of higher inflation as investors bet that the U.S. economy will gather strength in the coming months. Additionally, the market participants continue to assess the full impact of Joe Biden’s USD 1.9-trillion stimulus plan.
The G-sec bond auction for Rs 310 billion held last week saw very low demand for bonds and RBI had to devolve more than Rs 200 billion to the bond auction underwriters, close to 70% of the total auction was given to the underwriters. RBI also gave high commission to the underwriters, much more than what they normally pay, in order for the auction to be underwritten.
USD came under pressure last week as market participants expect that the massive US fiscal stimulus is on its way shortly and amid the release of weak inflation data. The House of Democrats released the first draft text for the legislation that will make up the covid stimulus bill, taking the USD 1.9 trillion package a step closer to approval.
CPI inflation for January 2021 came in at 4.06% while core CPI, which is ex food and fuel, came in at 5.7%. Core CPI is showing broad based inflationary pressures, driven by high fuel and commodity prices and also supply constraints due to high demand for goods and services on the back of government spending. Inflationary pressures are on the higher side and this can hurt bond investors if yields stay low for a longer period of time. CPI inflation for January 2021 came in at 4.06% while core CPI, which is ex food and fuel, came in at 5.7%. Core CPI is showing broad based inflationary pressures, driven by high fuel and commodity prices and also supply constraints due to high demand for goods and services on the back of government spending. Inflationary pressures are on the higher side and this can hurt bond investors if yields stay low for a longer period of time.
INR shrugged off 2 major negative factors to close last week on a stronger note. The government showed a high fiscal deficit in its budget for fiscal 2021-22 while the RBI hiked the CRR of banks to sterilize excess liquidity. Markets focused on the growth optimism on the Indian economy, as it bought into the INR.
RBI hiked the CRR by 1% in its policy review last week, as it sought to slowly normalize policy in the face of higher inflation. Growth prospects are brighter given high government spending and this is signal for inflation to rise. The government forecast a fiscal deficit of 6.8% of GDP for FY22 while it was at a whopping 9.5% of GDP for FY 21.
The Economic Survey 2021 has forecast India real GDP growth at 10% to 11% and nominal GDP growth at 15%, largely due to base effect on the back of negative grpwth seen in fiscal 2020-21 due to Covid pandemic. Trend grpwth after fiscal 2021-22 js seen at 6.5% to 7%. Inflation too is expected at over 6% for fiscal 2021-22. Given that India GDP growth is seen at higher levels while US Fed and ECB keep rates at lows and pump in liquidity, capital flows can be strong and drive up the INR in the near term. However, the cost of growth will drive the INR value over the longer term as high fiscal deficit can lead to higher inflation that might drag sustainability of economic growth.
The bond market can expect a minimum of Rs 7 trillion of net central government borrowing and Rs 7 trillion of state government borrowing for the fiscal year 2021-22. The Union Budget for 2021-22 is expected to be inflationary, as the government spends to push up GDP growth to double digit levels. Assuming that fiscal deficit of center and states is pegged at 5% and 4% of GDP respectively for fiscal 2021-22.
In the last government bond auction conducted on the 22nd of January 2021, the bond market clearly showed its reluctance to bid for bonds at current levels of yields. The 5-year benchmark bond saw the RBI devolving the full auction on to the underwriters, as bids were well above 5.3% levels, almost 40bps higher from lows seen a few months ago. RBI also did not accept any bids for the 10-year benchmark bond, as the market bid at higher levels.
USD saw some stability at lower levels on optimism over the US economy on the back of a new large stimulus package. However, USD has been on a continuous slide over the last 8 months on the back of Fed printing money to nullify the covid impact on markets and economy.
UST yield curve has steepened by around 60 bps over the last few months, with 10-year treasury yields moving by almost 70bps from lows of 0.4% to 1.1% seen in 2020 while the short end of the curve is around .10% levels. The yield curve is showing classical steepening movement on the back of inflation expectations even as the Fed fuels inflation by keeping rates at 0%.
USD was pushed higher against major peers last week following a Democratic win in the Senate elections in the state of Georgia. For the first time in a decade, the Democrats will control the house of representatives, the Senate, and the Presidency in a so-called Blue wave.
Bond yields are treading shallow waters and can become unsustainable at these levels despite RBI protection. The 777 factor will come into play and push up the 10 year government bond yield sharply from current levels of 5.85%. Further the fact that 10 year UST yields crossed 1% levels this year on expected large scale US stimulus will further pressure the 10 year government bond yield.
USD lost ground as US President Donald Trump signed the second stimulus package to support an economy damaged by the pandemic. The relief package is supporting risk assets and is putting pressure on the USD, which used to act as a safe haven during the crisis.
RBI by significantly using its muscle power in the government bond market has sidelined the liquidity providers in the market. Bond traders have almost stopped trading as weekly heavy supply of bonds from the government and states and RBI protecting the yield curve have left them with no appetite to make markets.
USD gained marginally from lows last week as investors turned to the safe-haven asset as many countries tightened restrictive measures against the new mutant COVID-19 virus. However, optimism over COVID-19 vaccines being effective against the new mutant strain of COVID-19 found in the UK boosted the market sentiment.
RBI did not accept any bids in the Rs 90 billion 10-year benchmark bond, the 5.85% 2030 bond, auction held last week. The market bid at yields much higher than the closing levels of 5.93% on the bond and RBI did not want to send signals that it was fine with yield on the bond trending higher.
The 5.85% 2030 bond will see a period of uneasy calm before there is a sudden sharp rise in yields, most probably before budget in February 2021. High government spending coupled with huge liquidity flows will raise inflation expectations sharply and this will prompt markets to reset yields to higher levels.
Safe-haven USD fell against the INR, but it was trading higher versus its major peers on fading hopes for Brexit and U.S. stimulus deals. U.S. lawmakers are expected to pass a one-week spending bill to fund the government, but the House has indicated that anything beyond that would require agreement to a broader fiscal stimulus plan. Unfortunately, little progress has been made and Senate Republicans say they do not have majority support for the current bill. If agreements cannot be reached in the next week or two, there could be a sharp rise in volatility in currency markets.
RBI announced an operation twist for Rs 200 billion as soon as it saw the market bidding at higher yields in the auction of the new 10 year benchmark bond, the 5.85% 2030 bond. The bond yield cut off was at 5.90%, 5bps higher than the last week cut off at 5.85%. Operation twist is where the RBI sells short term bonds and purchases longer term bonds, which helps keep down the 10 year benchmark bond yield.
RBI in its policy review last week said that surging capital flows has led to heavy USD purchases to prevent a sharp appreciation of the INR. USD purchases have led to huge liquidity infusion in the system. Fx reserves are at record highs and RBI fx intervention has resulted in addition of over Rs 2 trillion of liquidity.
RBI is maintaining an ultra-accommodative monetary policy to negate the effects of covid 19 pandemic that has led to 2 consecutive quarters of negative GDP growth in fiscal 2020-21. While growth collapsed, inflation has risen sharply to well over 7% levels, far above the RBI target of 4%. The forecast for inflation is around 5% in the 1st half of fiscal 2021-22 while growth will rebound considerably, largely on base effect. RBI is willing to live with real interest rates of negative 4% for growth to accelerate.
Optimism over a rapid rollout of COVID-19 vaccines, which may result in faster economic recovery across the globe, underpinned the sentiment for emerging-market assets. Owing to this, the safe-haven USD weakened globally and, in turn, supported the Indian currency last week.
The government issued a new 10 year bond, which saw the cut off yield at 5.85%, higher than the 5.77% cut off yield seen in the auction of the previous 10 year benchmark bond, a couple of months ago. The yield of 5.85% is still low as the last time government bond yields went below 6% was in 2008-09 during the global financial crisis. However, the market is showing reluctance to bring down the bond yield despite RBI’s firm commitment to keep down the long bond yields through OMO purchases of around Rs 1.4 trillion including operation twists and SDL purchases.
USD slipped against major world currencies last week, while riskier currencies were trading higher, buoyed by improved risk appetite following COVID-19 vaccine progress and Joe Biden's U.S. election victory. The surge in COVID-19 cases across the US and Congress remains deadlocked over an additional rescue bill h kept the USD from weakening too fast.
Markets took profits on shorts as USD had fallen sharply in anticipation of fresh stimulus by the new US president. This will be temporary given that Fed will pump in money to support the huge fiscal spending by the US government on resurgence of corona virus.
The government a fiscal stimulus package of USD 20 billion as a Diwali gift to the economy in addition to an incentive scheme worth around USD 800 million to revive the covid hit economic growth. The fiscal package comes in the wake of severe stress on government finances as seen by the shortfall in revenues.
Joe Biden winning the US Presidential elections will weaken the USD as the government will float a fresh and huge fiscal package to shore up the covid hit US economy. Fed has indicated continued record low rates and bond purchases, adding huge amounts of USD liquidity into the system.
U.S. election results, Joe Biden presidency checked by a Republican-controlled Senate will lead to USD weakness going ahead. The Democrat is seen pursuing policies conducive to trade and the environment, while a divided Congress may stop him from firing a fiscal bazooka. That means more exports and faster growth for developing nations, as well as a boost for riskier assets from a more accommodative Federal Reserve.
USA Elections 2020 results have not been announced yet. Democratic candidate Joe Biden is leading Republican nominee, President Donald Trump, in terms of electoral votes. Markets are factoring in Biden's Win in USA Election 2020 as he's inching towards the majority of 270 mark.
INR fell against USD across the week in risk off trading. Rising COVID cases across the globe and no US fiscal stimulus have unnerved investors prompting a move out of riskier assets and currencies, such as the INR towards safe havens such as the USD. On the domestic front, expectation of another stimulus package is doing round and that could also weigh on the INR. Market participants are waiting for more clarity on the same and that could keep the volatility in check.
INR ended the week lower against USD last week despite improvement in the global risk sentiment as RBI bought USD to prevent sharp appreciation of INR. The RBI has stood in the way of INR appreciation for the past couple of months and absorbed most USD inflows of foreign investments into Indian companies and assets. Since the beginning of September, the RBI has added USD 13.69 billion to its foreign exchange reserves, taking it to a record high of USD 555.12 billion as on Oct 16. INR depreciated by 0.35% against the USD last week and depreciated by 1.43% against the euro.
The bond market is now absorbing weekly supply, upwards of Rs 300 billion and has been absorbing weekly supply of over Rs 400 billion in the last 6 months. The supply inundation has led to a steep yield curve with the spread of the 1 year tbill to the 10 year bond at levels of over 250bps. SDLs too have seen spreads rise to 85bps from levels of around 60bps despite RBI announcing SDL OMO purchases for the first time ever.
INR ended the week lower against USD last week after IMF forecast that the Indian economy would contract by -10.3% this year after being severely hit by the coronavirus lockdown. However, the IMF was upbeat regarding its recovery saying that India was well placed to start recovering from the crisis with the support from fiscal and monetary policy.
Inflation is much higher than RBI managed interest rates and this can lead to macro economic instability as real negative rates hurts private savings and also leads to currency depreciation that will cause outflows of capital. Low rates at times of rising inflation will lead to excessive debt in the economy as government and corporates get cheap money and this can lead to inflation trending higher.
INR ended the week marginally higher against USD last week amid improvement in the appetite for riskier assets across the globe and due to persistent foreign fund inflows for investments into Indian entities. However, the gain remained capped as RBI intervened in the currency market to avoid sharp INR appreciation. INR appreciated by 0.01% against the USD last week and depreciated by 0.65% against the euro.
Bond markets are now held captive by the RBI, as they cannot express their views on macro economic policies and expectations on inflation. In the short term, bond yields will stay lower, as RBI has taken out the market’s ability to short but in the longer term, the repercussions will be catastrophic if the economy does not recover in a sustained manner.
The government kept to its budgeted borrowing plan for fiscal 2020-21, as it released the 2nd half borrowing program. The borrowing program size was increased in April 2020 on COVID led lockdown. Bond markets were nervous on higher than expected borrowing for the 2nd half but were provided relief by the government.
INR ended the week higher against USD last week as the demand was largely buoyed by foreign investments into a slew of Indian companies. INR appreciated by 0.64% against the USD last week and marginally depreciated by 0.01% against the euro.
RBI sent out two different signals to the bond market last week, confusing traders who were anyway nervous on the 2nd half supply of bonds from the government. In the OMO bond purchase auction, RBI rejected all bids and traders took this as a signal that the central bank did not want to accept bids at lower than market yields.
INR traded lower against the USD last week as the market sentiment weakens amid concerns that a surge in COVID-19 cases may hamper economic recovery. However, INR garnered support from likely foreign fund inflows for initial public offerings of three Indian companies that were open for subscription for foreign investors.
RBI devolved the full auction of the Rs 180 billion benchmark 10 year bond, the 5.77% 2030 bond, on to the Primary Dealers indicating its preference for lower yield cut off in the auction. The devolvement was at levels of 6.02%. This is the second consecutive devolvement for the full auction of Rs 180 billion of the 5.77% 2030 bond, the devolvement was at yields of 6.14% on the 28th of August.
RBI August 2020 policy minutes suggest hawkishness over inflation and possibility of no more rate cuts going forward. Central and state government finances are in a huge fiscal mess and borrowings are set to increase from already high levels. Normally inflation plus heavy bond supply will push up yields sharply to levels where the market is comfortable in absorbing the supply.
RBI August 2020 policy minutes suggest hawkishness over inflation and possibility of no more rate cuts going forward. Central and state government finances are in a huge fiscal mess and borrowings are set to increase from already high levels.
In normal times, high government bond supply and inflation trending at higher than RBI target levels would push up bond yields, as markets would increasing the risk premium on bonds. However, given the pandemic that has led to a steep fall in GDP for the 1st quarter of fiscal 2020-21, RBI is intent on supporting government borrowings at low yields and when markets took up yields by 40bps post release of hawkish RBI August policy minutes, the central bank came out with supportive measures and a strong statement on keeping down yields.
In normal times, high government bond supply and inflation trending at higher than RBI target levels would push up bond yields, as markets would increasing the risk premium on bonds. However, given the pandemic that has led to a steep fall in GDP for the 1st quarter of fiscal 2020-21, RBI is intent on supporting government borrowings at low yields and when markets took up yields by 40bps post-release of hawkish RBI August policy minutes, the central bank came out with supportive measures and a strong statement on keeping down yields.
RBI governor came out with worried statements on market behavior and MPC minutes showed high worries on inflation by members. Given the continued high supply of government bonds and SDLs and with switches that increases supply of long end paper, RBI worries on inflation and markets hit bond yields hard. There is nothing to look forward to for traders, as supply and high inflation rules at present.
RBI devolved around 20% of the new 10 year bond, the 5.77% 2030 bond, on to the primary dealers, indicating its unwillingness to chase the tail. The market was spooked by inflation for July printing at close to 7% levels and cut off yield for the 5.77% 2030 bond in the auction was 5.96%, almost 20bps higher than the yield at which the bond was first auctioned in end July.
RBI kept rates at record lows in its policy review last week and pledged high liquidity and continued accommodative policy given the forecast of negative GDP growth this year. The central bank has kept the door open for more rate cuts. The lack of rate cuts pushed up bond yields marginally across the curve.
RBI policy this week will see no changes in monetary policy given that markets have largely been stable since its June policy. The government issued a new 10 year bond, which saw the auction cut off at 5.77% not very far down from the old 10 year bond yield, the 5.79% 2030 bond that was trading at levels of 5.80%.
The COVID 19 lockdown continued in July across states, placing a question mark on the resumption of business activity in the country. The first few results for the 1st quarter of FY 21 does not look promising with major industry players in the infrastructure, automobile, and other industrial sectors reporting degrowth in the quarter with no optimism on guidance. Agri and to some extent pharma and FMCG sectors have shown traction while the IT sector has shown some sort of stability but no promising outlook on growth.
The spread differential between the new 10 year bond, the 5.79% 2030 bond and the old 10 year bond the 6.45% 2029 bond is at just 9bps. The spread has fallen from over 20bps since the issuance of the new bond. The sharp fall in spread indicates that the market is bullish and is willing to compress the spread for extra yield.
RBI has been aggressively buying USD to prevent an INR appreciation and this is driving down yields across the yield curve. However, short end yields are down sharply with 5*10 segment of the curve spread at 92bps indicating the liquidity effect of fx purchases. RBI has bought USD 35 billion of fx, April to date, and has added Rs 2.2 trillion of liquidity into the system.
Lower global crude oil prices have had an opposite effect on retail fuel prices, with the prices rising by more than 12% over the last one month. The government desperately requires revenues given the economic slowdown on lockdown and is targeting duties from fuel as a source of revenue.
INR ended the week lower last week as RBI Governor Shaktikanta Das, in an out-of-schedule monetary policy address announced that the Monetary Policy Committee decided to lower the repo rate by 40 basis points to an all-time low of 4.00% to combat economic risks linked to the COVID-19 pandemic.
INR ended the week marginally lower against USD as market participants were worried about the impact of the coronavirus pandemic on India’s macroeconomic fundamentals after the Centre said it will have to borrow an additional Rs 4.20 trillion in 2020-21.
The government is looking at further measures to support the economy that has suffered due to the lockdown, and the total bailout and stimulus coupled with lack of tax collection and other revenues could potentially double the fiscal deficit from targeted 3.5% of GDP.
10 year benchmark bond, the 6.45% 2029 bond, saw volatile trading last week, falling by 30bps then rising from lows by 14bps. Bond markets got a whiff of impending rate cuts and took down yields from highs and once RBI announced its rate cuts on Friday, the markets took profits.
RBI, in line with Fed, ECB, BOE, BOJ and other global central banks has commenced bond-buying through OMO purchase auctions to infuse liquidity into the system and also to try and keep surging costs of corporate borrowing down with lower government bond yields. RBI conducted Rs 100 billion OMO purchase auction last week and will be conducting Rs 300 billion of OMO auctions next week.
Despite the improvement in global risk appetite, INR traded lower against the USD last week as market participants remained cautious over the state of the economy after India’s headline inflation surged to an over five-year high of 7.35% in December from 5.54% in the previous month.
INR ended the week lower against the USD after exhibiting volatility during the week amid uncertainty over US-China trade deal, rising crude oil prices, foreign fund outflows and on fears that the RBI may prevent a sharp rise in the INR through its USD buying interventions.
The cut off in the auction of a new 10 year benchmark government bond came in at 6.45% and the bond yield trended up by 1bps post cut off to close at 6.46%. The old 10 year benchmark bond, the 7.46% 2029 bond saw yields close at 6.66%, 20bps spread to the 6.45% 2029 bond.
INR ended lower against the USD last week, as the appetite for riskier assets worsened amid escalation in trade standoff between the US and China over the weekend. INR was also under additional pressure after a slump in India’s GDP growth for the quarter ended June 2019 weakened the sentiment and affirmed the case of slowdown in global economic growth spilling over to emerging markets.
The release of weak GDP growth data for the1st quarter of fiscal 2019-20, where GDP growth came in at 5%, against full year growth forecasts of around 7%, increased markets expectations of rate cuts by the RBI in its October 2019 policy review.
The 2 year government bond saw yields at 5.87% levels with strong bids seen in the last auction. However the benchmark 10 year bond has seen yields rise by over 25 bps from lows over the last three weeks on worries of extra borrowing by the government to provide stimulus to the economy.
INR fell to Rs 72-mark against the USD for the first time in 2019, following s selloff in domestic equities and amid weakness in Chinese Yuan, which fell to a fresh 11-year low level. INR depreciated by 0.71% against the USD last week and depreciated by 0.52% against the euro.
The RBI is going into this week’s policy review on the back of global bond yields plunging to fresh lows on Fed rate cut and increased tensions in the US-China trade war, the government calling for large rate cuts to shore up a flagging economy and the bond markets pulling down yields to levels factoring in more accommodation in the form of rate cuts and liquidity.
The bullish case for interest rates is still high and that will keep the 10 year government bond yield down and on a downward path, with bits of volatility here and there. RBI, if it sounds caution on more rate cuts in its August policy meet, can drive up the bond yield sharply.
The election victory for the ruling NDA party has taken out political risk from bond markets and also ensures continuity of fiscal policy, as laid out in the interim budget for fiscal 2019-20. Bond yields fell sharply on rate cut hopes and increased liquidity infusion by the RBI.
INR strengthen last week against the USD amid broad weakness in USD and easing crude oil prices. Crude oil prices fell sharply after data released on Thursday showed that US crude stockpiles rose 9.9 million barrels in the week ended Apr 26 to 470.6 million barrels, highest since September 2017.
The Indian rupee saw strong gains last week on hectic FII buying of Indian assets. The currency is aided by dovish Fed and ECB, low domestic and global inflation and speculation on the current government being reelected in the May 2019 polls.
The interim budget for 2019-20 unveiled higher spending by the government on farmers and unorganized workers and tax sops for the middle class, which have led to fiscal deficit being set at 3.4% of GDP, higher than target of 3% of GDP.
The rate cut by the RBI in its policy review last week, saw the markets pulling down yields at the short end of the yield curve with the benchmark 5 year government bond yield falling by 21bps while the 10 year benchmark bond yield fell by just 5bps on a week on week basis.
The INR was highly volatile last week but managed to end the week higher against the USD despite USD exhibiting strength mid part of the week against major world currencies largely on the back off easing tensions between the White House and the Federal Reserve. However, tumbling oil prices continued to provide support to INR.
The bond market has had a difficult period for the whole of this fiscal year with sentiments being hurt by multiple factors of INR depreciation, FII selling, bond supply from centre and states, RBI rate hikes, rising oil prices and even a credit crisis on IL&FS default. Liquidity too has turned structurally negative.
The bond market is hit by negative factors from all sides, falling INR, negative BOP for the 1st quarter of fiscal 2018-19, rising fuel prices, RBI rate hike expectations in October, higher probability of more Fed rate hikes, risk aversion on global trade tensions and impending higher government bond supply starting October 2018.
50bps rate hike will take up bond yields by around 25bps after which yields will stabilise. Overall, bond markets will view the 50bps rate hike as positive as pace of rate hikes can then be easily calibrated going forward removing market uncertainty.
Indian rupee slumped to its lowest-ever close on Thursday at Rs 68.88 against the USD, the previous closing low was the Rs 68.81, on August 28, 2013, when the currency was in a free fall as foreign investors pulled out from emerging markets in what came to be known as the ‘taper tantrum’.
RBI and the government must calm fears on Banks stability if markets are to trade normally. Fear provides opportunity for traders and investors to buy into higher yields but volatility will be high and one would have to have a strong heart to ride out the volatility.
State government borrowings are rising and rising fast. India’s state government borrowing at over Rs 4.07 trillion in fiscal 2017-18, is around 22% of total SDLs outstanding as of fiscal 2016-17, which was at Rs 18548 billion.UDAY bonds outstanding is at Rs 2.08 trillion.
Confused where to invest in the current fixed income environment? Look no further than 3 & 5 year AAA corporate bonds that are looking extremely attractive on the curve. At levels of 7.95% and 8.18% for benchmark 3 & 5 year AAA corporate bonds respectively, spread over repo and spread over the corresponding maturity government bonds offer high returns as well as high margin of safety.
Bond prices tanked again last week, taking 10 year benchmark government bond yields to two year high levels of over 7.75%. Bond yields have been on a sustained rise since October 2017, with yields rising by over 100bps. Bond yields rose to levels of 7.78% last week before paring losses to close at 7.68%.
The Central and State Governments are set to borrow a total of around Rs 11 trillion in fiscal 2018-19. Central government gross borrowing is estimated at Rs 6.4 trillion (Read our note on Fiscal Deficit and Government Borrowing for 2018-19) while states could borrow a gross of Rs 4.6 trillion.
RBI is causing more confusion for markets at a time when there is extreme nervousness. The Central Bank rejected all bids for the 7.73% 2034 bond and the 7.06% 2046 bond in the government bond auction last week. RBI had first rejected bids for the long bonds in the auction on 5th January and then accepted all bids in the auction on 12th January at much higher levels of yields.
Stronger-than-expected economic data along with hawkish comments from Federal Reserve officials and sharp fall in Euro after Catalans voted for independence helped to propel the USD sharply higher before the rally fizzled on reports that North Korea could test missiles this weekend.
India reported its highest fx reserves at USD 400.7 billion as of 8th September 2017 despite current account deficit jumping to 2.4% of GDP in the 1st qtr of this fiscal year from 0.1% of GDP and 0.6% of GDP in the 1st and 4th quarter of last fiscal year respectively.
USD remained highly volatile last week but managed to end the week higher against all of the major currencies except for the British pound despite a weaker retail sales report and news that North Korea fired another missile over Japan.
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 Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 4645 billion as of 1st September 2017 from levels of Rs 3437 billion as of 25th August 2017.
USD was volatile last week amid renewed geopolitical tension in the Korean Peninsula and drop in investor expectations of a third rate hike later this year, after Federal Reserve chair Janet Yellen avoided talking about monetary policy in her speech at Jackson Hole.
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 Facilities (MSF or Marginal Standing Facility and Export Credit Refinance) and MSS bond issuance was in surplus of Rs 3437 billion as of 25th August 2017.