Fixed income: Gilts under heavy pressure as RBI restricts liquidity to help Rupee - ICICI Bank : Treasury Research

The bond markets traded under heavy pressure this week, as RBI has resorted to liquidity tightening and raised cost of borrowing in order to curb depreciation pressures on the Rupee. The benchmark bond yields spiked 60 bps in an immediate reaction to the measures and witnessed its worst trading week in 4 ½ years, with an incremental rise of 41 bps.

OIS curve witnessed sharp inversion

The 1Y and 5Y rates rose 116 bps and 58 bps respectively to end the week at 8.70% and 8.08%. The 5Y/1Y spread has widened to -62 bps as against average +2 bps last week.

FII debt outflows continue to persist

FII debt outflows continue to persist given the vulnerable global investor sentiment. Total FII debt outflows since 22nd May and from the start of the fiscal have been to the tune of USD 8.6 bn and USD 5.3 bn respectively. The overall FII debt utilization status shows a drop to sub 40% levels as of 18th July-2013 as compared to 55% in early May before the outflows started.

RBI intervention has weighed on the liquidity situation

FX intervention has contributed significantly to liquidity deterioration. The RBI is not rolling over the maturing forwards, thereby resulting in further pressure on systemic liquidity.

Yields to continue to witness upward pressure till the measures are implemented

The fixed income markets would remain under pressure till the measures are rolled back. In fact, with the impact on Rupee limited on the back of RBI measures as the currency has appreciated only around 30 paise during the week, the bond markets fear other stringent liquidity tightening measures by the Central Bank.

Forex: Rupee the best performing Asian currency during the week

Rupee the best performing Asian currency during the week

Within the Asian currency pack, INR has been the best performing currency. A confluence of domestic as well as international factors weighed on the Rupee to prevent any depreciation pressure that was seen during last few weeks.

Rupee supported by weaker Dollar

Dovish comment from Bernanke supported weaker Dollar

Domestic policy actions further capped the downside for the Rupee

On the domestic front, a series of measures taken by the policy makers i.e. RBI and the Government authorities, stem the depreciation pressure in the Indian Rupee

Outlook - Rupee to remain supported in the near term

We believe that though the Rupee volatility will continue to decline in the near term, in the medium term, the depreciation pressure will abate as current account deficit begins to ease.

Source : Equity Bulls

Keywords