Column on ET (Pennywise): 16 JAN 2012

Invite your attention to the Bond market outlook column on ET Pennywise

Quote

Money market continues to be in firm grip of tight liquidity and high short term interest rates. The draw down from LAF counter is over Rs.1.25 trillion (at 3% against RBI’s comfort level of 1% of NDTL) guiding overnight rate at elevated level around 8.75% which in-turn has pushed 3-12M rates into 9.75-10.25%. The pipe-line economic data on inflation and growth has no significant relevance at this stage given the consensus in expectation of downtrend in inflation into 6.75-7.0% by March 2012 while facing deceleration in growth momentum below 7.0%. There is confirmation of shift in macroeconomic dynamics from moderate growth; high inflation into low growth; moderate inflation phase. The resultant shift into rate reversal cycle soon has provided stability in 10Y bond yield around 8.20%. OIS rates have already priced in easing monetary policy with 1Y and 5Y OIS rates trading at huge discount to benchmark overnight MIBOR. The liquidity situation will worsen on shift into new reporting fortnight starting 14^th January with risk of trigger of MSF counter at 9.5%. The shift of stance in FX market with RBI into USD buy mode (to prevent extended rupee gains below 51.50) will provide bit of relief. Given these factors into the week, call money rate is expected to trade at elevated level of 8.75-9.5% with upward bias on short term money market rates into double digit. Bond market will be driven by external cues with investors continue to stay in risk-off mode and resultant strong dollar (lower EUR/USD); decline in US Treasury yield and weak stock market will provide stability in 10Y bond yield at 8.15-8.25% with test/break either-way to attract.

Moses Harding

Head – ALCO and Economic & Market Research

IndusInd Bank, Mumbai