indian economics

Topics: Bond, The Analyst, Investment Pages: 19 (2086 words) Published: March 1, 2014
India | Strategy

19 July 2013

Economics
Acceptance of high bids in auctions….
8.6

(%)

Source: RBI

… would see further rise in yield curve
10.0
9.5
9.0
8.5
8.0
7.5
0.0
1.1
2.2
3.4
4.5
5.6
6.7
7.8
8.9
10.0
11.1
12.3
13.4
14.5
15.6
16.7
17.8
18.9

7.0

16-Jun

17-Jun

18-Jun

19-Jul

Source: NSE, Elara Securities Research

OIS reflecting a policy rate hike…
9.0
8.5
8.0
7.5
7.0

1-yr OIS

19-Jul

17-Jul

15-Jul

13-Jul

9-Jul

11-Jul

7-Jul

5-Jul

3-Jul

6.5

5-yr OIS

Source: Bloomberg, Elara Securities Research

…making move on CRR plausible
10
8
6

Jun-13

Jan-13

Oct-11

Mar-12

May-11

Dec-10

Jul-10

2

Aug-…

4

Feb-10

Of course, liquidity has to be much lower than current floor of LAF for the current measures to succeed. Also, CB has more privy information on whether liquidity is fuelling speculation and if evidences to that effect are found, it clearly leaves a CRR hike as an impending move. Obviously, after coming this far on current

stance, chance of a premature policy withdrawal looks slim.

GS2023

Sep-09

CRR remains a policy option: CB's task of managing INR through the liquidity channel is challenging. Chances of more OMO sales had come off post yesterday’s fiasco but with today’s acceptance of higher bids in primary auction, even that cannot be ruled out in the near term. However, if today’s bid acceptance was a one-off giveaway; possibility of other bold measures cannot be ruled out.

GS2019

Apr-09



RBI is in the market for a long haul: We believe that the current stance will remain in vogue atleast till September because that is when US Fed is expected to give clarity on the possible
withdrawals on the QE program. Moreover, CB’s measures have to be more than short-term quick fixes because the underlying concern on INR stems from an unsustainable and rigid CAD
funded through volatile capital flows amidst fears of sudden halt of inflows.

GS2042

7.8

1-Jul



Yields curves to shift upwards further: The higher bids in the auction are an indication of continued wariness in the debt
markets. This also signifies absence of genuine demand. Further to CB accepting these bids at higher cut-off prices, yield curves will see an upward bias in future.

GS2032

8.05

Jan-08



INR defense is the focus: CB's move is an indication of intent to defend the currency and INR should see some appreciation bias in early trades on Monday. However, if the INR weakens further, CB will use all policy options to defend the currency.

8.2

Jun-08



8.55

8.0

Yield curve (%)

Cautious takeaways:

8.52

8.50

8.4

(%)

After two days of fiasco in the bond market, the third attempt to suck out liquidity from the market through a primary auction of INR150bn met with a partial success with INR120bn sale. Effectively, the CB gave into higher yields as a hattrick of fiascos would have hit the current mandate of FX policy. Clearly, the CB in India has chosen to compromise on its role as the Debt Manager (DM) to the government (with inherent bias for lower interest rates) for the time being in an apparent bid to defend the INR. CB has been able to convince the government that INR defense is the priority at this time leading to acceptance of less-favorable pricing by the former at the bond auctions today.

(%)

Global Markets Research

The Event:

Nov-08

RBI dilutes DM role; INR priority

Source: Bloomberg, Elara Securities Research

Ashish Kumar •ashish.kumar@elaracapital.com • +91 22 3032 8536 Elara Securities (India) Private Limited

Elara Securities (India) Private Limited
Disclosures & Confidentiality for non U.S. Investors
The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the...
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