Ind-Ra: Consolidation Ahead of Crucial RBI and FED Policies

India Ratings and Research (Ind-Ra) expects both debt and currency markets to remain cautious ahead of two big events globally. This week, the 10-year benchmark yield is likely to be in the range of 7.44%-7.50% (7.47% at previous week's close) while the rupee might range between 67.05-67.75/USD (67.03/USD at previous week's close).

Bond Markets to Remain Cautious: The impact of open market operations (OMOs) has only been a minimal reaction in the bond market other than protecting from an upside movement in yield. Against INR1.35trn of gross G-Sec issuances raised since April 2016 including this week's auction, INR0.7trn have been OMO purchases and INR0.4trn have been redemptions. Hence, only INR250bn of net supply has come into the system. Ind-Ra expects the market to react on a favorable demand-supply equation once the uncertainties related to FED's action and concerns over monsoon start disappearing.

Liquidity to Improve in June: The core liquidity deficit is likely to improve in the coming weeks. Ind-Ra expects the net deficit to come down to 0.5% of net demand and time liabilities in June 2016. However, the overall aggregate deficit may remain 1% of net demand and time liabilities due to quarterly advance tax flows to the government. Hence, the scope of an OMO purchase in June will be neutral, and will mostly depend upon forex flows.

Rupee to Stay Range-bound: Ind-Ra expects a FED rate hike in the near term to remain a sensitive event for global rates and currencies, but to not be disruptive for the Indian rate market. The global market will be keenly focused on US nonfarm payrolls and unemployment data for May 2016, crucial data before the next FED meeting on 16 June 2016. Other than these, labor market data and PMI data for the euro will be important.

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