Money market players have cheered the latest round of cuts in key rates ? repo, reverse repo and cash reserve ratio (CRR) ? by the Reserve Bank of India (RBI) and see the 10-year yield falling below 5% soon. The rupee is also expected to appreciate as large inflows are expected out of FIIs investment in debts and liberalised external commercial borrowings.
RBI slashed both repo and the reverse repo rates by 100 basis points and CRR by 50 basis points on Friday. Gilt auctions are scheduled between January 13 and 20. Market players, who found the CRR cut, which will pump Rs 20,000 crore into the banking system, totally unexpected, say the move could kick in aggressive buying of bonds and profit bookings. Also most players were expecting the central bank to slash the repo and the reverse rate by 25-50 basis points at the most.
?The cut in the CRR rate was widely unexpected. The system is now flushed with excess liquidity. We already had a surplus of Rs 70,000 crore. Now that an additional Rs 20,000 crore has been pumped in, liquidity is more than comfortable,? said J Moses Harding, executive vice-president with IndusInd Bank. Moses expects the 10-year benchmark paper to hover around 4.95-5.10% in the short term.
On Friday, the benchmark paper of 2018 fell 22 bps to end at 5.07%. Dealers say now, under the government?s extra borrowing calendar announced, there could be some pressure on yields. The government is slated to borrow an extra Rs 45,000 crore, of which Rs 27,000 crore has already been completed.
Meanwhile, dealers also expect the overnight indexed swaps (OIS) to ease further on account of multiple rate cuts. ?With further rate cuts, the five-year OIS could come down to 4-4.25% from Monday. The curve is expected to flatten now,? said NS Venkatesh, MD & CEO, IDBI Gilts. In the last one month, the 1-year OIS shed 136-139 bps while the 5-year OIS is down 16-18 bps at 4.35-4.47% following the recent rate cuts.
Dealers expect the corporate bond market too to show some rally following the rate cuts and the increase in investment limit for FIIs in the Indian corporate paper. ?The corporate bond yields too could show some softness, following additional measures by the central bank,? noted Moses.
Players also see a slight appreciation in the domestic currency with the increased FII limits in corporate papers and relaxation in the external commercial borrowing norms.
On Friday, the rupee closed at 48.58/60 against the dollar, off a low of 49.13, its lowest since December 24, and stronger than its previous close of 48.76/78. ?The rupee could touch the 48.30 levels in the short term. However, the real impact of these measures need to be watched as FII sentiments may improve after being allowed to invest higher amounts in debts,? said a senior dealer with a private sector bank.
Rate cut follow-up
• On Friday, the benchmark paper of 2018 fell 22 bps to end at 5.07%
• Increased FII limits in corporate papers and relaxed ECB norms to make the Re appreciate slightly
