Stumbled Thursday on Lingering Suspense about Compound Interest Reimbursement Issue (COVID)
India’s benchmark stock index (NSEI) closed around 14873.80, surged almost +1.29% since Tuesday closing on RBI QE-Lite and positive global cues amid more dovish FOMC minutes, indicating no rate hike action at least late 2023. Nifty closed around 14819.05, jumped almost +0.92% Wednesday as banks soared on unexpected ‘desi’ pandemic QE by RBI; Indian bond yield slips, while currency tumbled. After numerous warnings to bond market participants not too greedy, RBI Governor Das finally launched the QE bazooka to keep India’s surging bond yields under control (back door YCC) and to fight COVID 2nd wave-induced economic slowdown (as a monetary vaccine).
On Wednesday, Bank Nifty jumped almost +700 points, before closing around +490 points (+1.51%) amid bond yield flattening, positive for bank’s NIM as banks generally borrow at shorter, while lending at the longer end of the bond yield curve. Also lower bond yield; i.e. higher bond prices are positive for banks, especially PSU Bank’s bond portfolio MTM as they are the largest holder of GSECs. India’s 10Y bond (GSEC) yield stumbled almost -0.65% and made a 7-weeks low of 6.059%, off the recent high of 6.274%. soared almost +1.50% and made a high around 74.59; higher USDINR is positive for India’s export savvy Nifty as more than 60% of Nifty earnings come from export.
On Thursday, made a further low around +6.033% on RBI QE-Lite and US bond yield easing. USDINR further surged by +0.25% and made a high around 74.92 despite suspected RBI intervention. Bank Nifty slumped -0.63% on lingering suspense about compound interest reimbursement issues by the government as banks may have to make a provision of at least around Rs.0.07T; but Nifty surged +0.37% on higher USDINR, positive for export savvy blue chips. And Nifty was also dragged in the closing hours as turned into red and as MP, one of a key Indian state announced weekend COVID lockdown.
On Thursday, the Nifty Indian market was helped by metals (global/local infra stimulus), techs (higher USDINR, H1B visa relief and hopes of blockbuster Q4FY21 report card), infra, realty, FMCG (possibility of a normal monsoon), media, automobiles, while dragged by banks & financials, energy (lower oil) and pharma to some extent. Nifty was boosted by JSW Steel (NS:), TCS (NS:), HDFC (NS:), Tata Steel (NS:), Infy, Ultratech Cement (NS:), Titan (NS:), Hindalco, Shree Cement, L&T, Tech Mahindra (NS:), and RIL. Nifty was dragged by HDFC Bank (NS:), Axis Bank (NS:), Kotak Bank, Bajaj Fin, SBI (NS:), Sun Pharma (NS:), Indusind Bank, and Power Grid (NS:).
Resolution of the Monetary Policy Committee (MPC) April 5-7, 2021: Full-text
On Wednesday, taking cues from major G4 central banks (Fed, ECB, BOJ, and BOE), India’s RBI finally launched the ‘Desi’ (Indian) version of QE-Lite. RBI termed it as Secondary Market GSEC Acquisition Programme (GSAP 1.0), in which the Indian Central Bank will commit upfront a specific amount of OMO (Open/Secondary Market Purchase) of GSECs to ensure an orderly evolution of the bond yield curve to ensure favorable financial conditions (ample system liquidity).
On Wednesday, the RBI Governor Das said in a prepared text:
Under the GSAP 1.0, RBI will buy Rs.1T GSECs from the secondary market in Q1FY22 (Apr-Jun’21). The market is now assuming RBI may buy around Rs.4-5T GSECs from the secondary market to support liquidity for the Federal government’s borrowing program of around Rs.13.5T in FY22 (Apr’21-Mar’22) to fund COVID/infra fiscal stimulus.
In his post-policy presser (Q&A), RBI Governor Das and Deputy Governor Patra acknowledged GSAP is the QE, which G4 Central Banks are doing; the difference RBI is now buying only government papers (bonds), which is of the highest quality and not any corporate (private) papers. The GSAP is besides existing OMO, Operation Twist and other liquidity management tools. The difference between GSAP (QE) and OMO is unlike OMO, the GSAP is calendar-based assured bond buying. The real intention is the orderly evolution of the bond yield curve on both sides (higher/lower).
Das also pointed out RBI is doing this GSAP to bring increasing Indian bond yield under control and to shield from external/global volatility. Das reiterated Indian bond market participants (usually DIIs) not too greedy and keep a win-win relationship with the government to help in the country’s development. Overall, RBI is now acting like BOJ with an Indian touch, trying to bring benchmark 10Y bond yield to at least +5.75%, if not +5.00%, at historical +100 bps spread with RBI repo rate, currently at +4.00%.
In recent times, RBI’s bond auction (GSEC) was in a tailspin amid tepid demands and occasional cancellations, virtually turned into a duet between RBI and bond market participants as the latter knows very well about the deluge of debt supplies by the government to fund COVID fiscal stimulus. In FY21, the Indian government borrowed around Rs.13T, while RBI bought back around Rs.3.13T from the secondary market through OMO. Assuming GSAP around Rs.4T in FY22 along with existing OMO, the RBI may buy around Rs.7T worth of GSECs from the secondary market, almost 50% of issuance (government borrowing).
In FY21, the Indian Federal government borrowed at an average rate of around 5.90% and the debt interest/revenue ratio was around 45%, which may go above 50% if 10Y bond yield does not sustainably fall below +6.00%. Thus the need of the hour is to bring Indian 10Y bond yield much below +6.00% on a sustainable basis. But this is a very difficult task even after RBI attempts to jawbone the market and the policy of back door YCC. As India’s core inflation is consistently hovering above +5.50%, now around +6.00% (March), it would be very difficult to bring a 10Y bond yield below +5.50% even by the latest RBI QE (GSAP 1.0).
Indian real interest (RBI repo rate – core inflation) is already running negative for quite a few quarters since COVID and thus, RBI may not go for any further rate cuts. The Modi government may go for a deposit rate cut by around -0.55% on an average for small savings instruments after Q1FY21 (state elections) for better rate cut transmissions and lower bond yields. But RBI may also go for normalization (gradual rate hikes) even before Fed (Dec’23) as it’s increasingly finding itself behind the inflation curve.
Despite some domestic structural issues and external vulnerabilities, the RBI policy of QE may weaken Indian currency (INR) further, which may also cause higher imported inflation. Thus, RBI may use the QE tool in a limited way to ensure 10Y bond yield hovers around +5.75%, below +6.00%, and not above.
Like BOJ, India’s RBI may also keep a ‘Laxman Rekha’ (Red Line) of 10Y bond yield between +5.50/5.75% to +6.25/6.50% for an orderly evolution of bond yield curve and favorable financial conditions (ample system liquidity). RBI governor Das made it clear that the GSAP series would be QE-Lite to balance both sides of equations (including growth & inflation, angel investors & borrowers). Like Fed, the RBI has to keep Indian government borrowing cost at the lowest/fair levels till at least FY22-23 to fund India rebuild/growth story (COVID and fiscal/infra stimulus).
Technical View: Nifty and Bank Nifty Future
Technically, whatever may be the narrative, Nifty future now has to sustain over 15015-15075 levels for further rally. Similarly, Bank Nifty now has to sustain over 32300-34400-34600 for a further rally; otherwise, expect some correction for both.
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