“From a supply perspective, for FY 22, Government bond supply is hardly left (~INR 470 bn) as we have seen back to back auction cancellations. This should be an added icing on the cake to support bond yields. We expect Operation twist kind of tools to be deployed in FY 23 as the mammoth borrowing program kick-starts.”
By Lakshmi Iyer
The RBI MPC voted for a status quo on key policy rates and majority members voted in favour of accommodative stance to continue. Ek pyaar ka nagma hai..maujon is rawani hai – this is a song from the movie Shor which I am reminded of as I read the policy statement. This certainly helped assuage the ‘Shor’ (abrupt yield rise) in bond markets.
Love is indeed in air – this valentine month. The RBI hummed the tune of Lata Mangeshkar and Mukesh by singing a love song to bond markets. In return, bond markets rejoiced in ecstasy (10 year gsec yield closed at 6.72%) – down from ~6.80 pre policy.
The RBI also reiterated that the accommodative stance would continue as long as necessary to revive and sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. While Omicron threat is easing no doubt, the RBI was seemingly growth focused, while not letting their eye off inflation too. The policy stance was way dovish than street expectations – a need of the hour to arrest abrupt rise in yields. Inflation forecasts for FY 23 at 4.50% is again way below street view – this needs regular review, especially in light of rising crude oil prices and could see some upside. It seems like liquidity management may remain the focal point for RBI – in that, 14 day variable reverse repo and repo is expected to be the key liquidity management tool. With this move, banks need not worry about potential cashflow mismatches in case they intend to lend in VRRR for longer tenor. Also, with 14 day repo allowance now available, we could expect overnight rates to gradually gravitate towards repo rate. The short end of the yield curve could therefore inch up in our view. The interest rate swap (OIS) curve was reflecting excessive bearishness (~100 bps of repo rate hike) which is likely to see some calm in the near term. Thus, long end yields can now find a strong anchor notwithstanding global headwinds. The current shape of the yield curve continues to remain steep – offering investors a chance to participate in high carry available. Repo rate hike is still some time away and current pace of normalisation seems to be the comfort area for the RBI for now.
From a supply perspective, for FY 22, Government bond supply is hardly left (~INR 470 bn) as we have seen back to back auction cancellations. This should be an added icing on the cake to support bond yields. We expect Operation twist kind of tools to be deployed in FY 23 as the mammoth borrowing program kick-starts. Key risk continues to emanate from global events – especially FOMC moves which could act as potential headwinds. Crude oil prices too may intermittently continue to haunt! From a fixed income allocation stand point, we see no change in our view – that of continue to earn the carry in fixed income and invest in line with the intended investment horizon.
(Lakshmi Iyer is CIO of Debt & Head, Products at Kotak Mahindra Asset Management Company. The views expressed are author’s own.)
TheSpuzz .. Click here to join our channel and stay updated with the latest Biz news and updates.