Range-bound bond markets this week: Jajoo

Bonds will trade between two week high-low as traders await RBI monetary policy review at month end factoring for a 25 bps repo hike later this month

Fixed income markets corrected last week on higher than expected readings on both the wholesale as well as consumer inflation. While WPI came in at a seven-month high of 6.46%, CPI inched further closer to double digit mark at 9.84%. More upsetting was shockingly higher food inflation at 18.4% in spite of a very good monsoon this year. With heightened expectations of another repo rate hike, bond markets sold off with benchmark government 10-year bond hitting an intra-week high of 8.66%. Sentiments also weakened on lingering uncertainty about US stalemate dragging the rupee down to intra-week low of 61.84 during this time.
 
However, after the public holiday on October 16, markets opened on Thursday with the cheerful news of the US stalemate getting resolved. With the US dollar having weakened to a new 2013 low of 1.3687, the rupee appreciated below 61 and with US treasury bond yields also easing, Indian bonds also found some support and benchmark government 10  year yields eased back to close at 8.55%, a net uptick of just 6 bps for the week, notwithstanding the elevated inflation situation. With some market talk of RBI considering withdrawal of dollar swap facility for oil companies, even though RBI clarified that if at all, it would be rolled back in a calibrated manner resulted in the rupee finally settling at 61.27. Corporate bond yields also eased by 6-8 bps in line with movement in government bond markets, with spreads remaining unchanged.
 
The shorter end money market rates remained broadly stable with one year bank certificate of deposit ending marginally weaker by 5 bps 9.15% and three month bank CD rates remaining unchanged at 9%. Short term rates were supported by lower weighted average cost of borrowings in the banking system. While marginal standing facility borrowings stood lower at Rs 38,000 crore against Rs 66,000 crore in the previous week, weighted average cut off rate on 14-day term repo also eased marginally to 8.79% from 8.84% on a seven day repo last week.
 
This week is a relatively dry week in terms of data points. The market will now focus on any indication from RBI on the possibility and magnitude of any repo rate hike as well as future guidance on interest rate stance. Short term rates should stay anchored at current levels with some downward bias on expectations of further reduction in MSF rate. Bond markets should also remain range bound, trading between two week high-low as traders await RBI monetary policy review at month end. Market seems to have priced in a 25 basis points hike in repo rate currently.
 
Mahendra Jajoo is Executive Director & CIO -Fixed Income at Pramerica Asset Managers