India Money Markets: What next?

External headwinds against domestic rate cut hope support

India 10Y Bond was in comfort zone at 7.65-7.80% against sideways mode in US 10Y yield at 1.85-2.10%, steady call money rate around Repo rate and Rupee appreciation from 63 to 62.00-62.15. The 25 bps rate cut hope provided solid support at 7.80% for post rate cut push into 7.50-7.65% with added support momentum from elevated India-US 10Y yield spread at 5.90-6.0%.

The bolt from the blue was from all sides; US 10Y yield spiked through 2.10% into 2.35% squeezing the yield spread to 5.50/5.60% (lower end of set focus at 5.50/5.60-5.90/6.0%), squeeze in domestic liquidity pushed overnight rates up cutting the carry premium and Rupee pushed down from 62.00-62.15 to over 64.00 despite DXY losing ground from 100 to below 95. All these sudden developments pushed 10Y bond yield up to 8% unwinding the post-NaMo rally from 8.65% to 7.60% in roller coaster ride.

Loss of appetite against huge pipeline supplies is worry despite rate cut ahead

Post relief from 8%, 10Y bond continue to struggle at 7.90-7.95%, despite cues turning better. Rupee swift recovery from 64.28 to 63.45 and ease in US 10Y yield from 2.35 to 2.10% are major relief. The concerns now are from elevated near/short term money market rates and loss of appetite from Banks (against huge excess SLR) and other financial intermediaries. The risk of limited upside from here has led to shift of DII appetite from Gilts to Corporate bonds, while FIIs are already in exit mode. All taken, 10Y bond 8.40% 2024 is expected to stay boxed at 7.85-8.0%, into lower end on 25 bps rate cut or into higher end (and beyond) on rate pause. Relief rally beyond 7.85% into 7.50-7.65% can only be from 50-100 bps CRR cut driving the operating policy rate from Repo-MSF to R/R-Repo rate corridor, which is not seen to be in RBI radar at this stage, maybe in August review. Having said all these, RBI support at 8% will get strategic investors to build for intra-2015 pull back into 7.50-7.65%.

For now, let us set focus at 7.85-8.0% with attention on India-US 10Y spread at 5.70-5.95%; given the high probability of US 10Y yield stability around 2.0%, India 10Y yield would settle at 7.70-7.95% with bias into lower end. The strategy is to stay in sideways mode at 7.85-8.0% awaiting shift of focus into 7.70-7.85% soon. Good luck!

Moses Harding