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Indian Markets:

Indian Bond markets saw bout of volatility after a long time post the release of the US employment report on 10th which surpassed most  expectations as the unemployment rate fell to 4.10%. This pushed the Dollar Index to 109.96, putting pressure on INR which touched  an all-time low of 86.64 and the benchmark 10yr bond yield touched a high of 6.85% before closing the week at 6.77%, unchanged  from a week ago, helped by some timely action by RBI on the liquidity front which re-ignited hopes of a rate cut even though INR ended  the week at 86.61 depreciating 0.8% over the week. The yield curve bear steepened with the longer end of the curve underperforming. CPI Inflation eased to 5.22% against market  expectations of 5.30% and the previous reading of 5.48%. The lower headline numbers was due to favourable base effects, the  sequential momentum remained unchanged. Core CPI slowed to 3.60% from 3.70% in Nov. WPI increased to 2.37% in Dec, higher  than market expectations of 2.20%. Core WPI inched up to a 5-month-high of 0.70% YOY in Dec from 0.50% in the previous month.  Trade deficit for Dec stood at USD 21.90 bn though CAD is expected to be manageable around 1.30% of GDP.  

RBI announced commencement of daily VRR (variable rate repo auctions) to reduce the Overnight rates even as FPI outflows continued  with the cumulative outflows from debt and equity combined at USD 6bn till January 17th. The announcement of the daily VRR and  with news reports suggesting that the new regime at RBI was more flexible on the currency along with taking other steps to boost durable  liquidity in the banking system led to a recovery in the bond markets. The OIS curve reacted to the liquidity measures announced by  RBI and the curve steepened with the 1yr OIS moving lower by 6 bps to end the week at 6.46% while the 5yr OIS ended the week 1  bps higher at 6.23%. Crude prices remained elevated and ended the week at 80.79, up a dollar during the week. The entire movement in the Bond/Currency markets since the outcome of US Presidential elections has been strongly co-related with  the movements in the US bond Yields and the dollar Index. Almost the entire depreciation in INR has come in the last three months.  

Money Market yields reacted positively to the liquidity enhancing measure taken by RBI with short tenure CD yields (maturing up to  March) coming down by 10-15 bps while the 1yr CD yields came down by around 10bps.

International Markets: 

US bond yields had a sigh of relief as US bond yields cooled after the Inflation number printed in line with expectations and retails sales  came in weaker than expected. The Dollar Index fell marginally to 109.35 from 109.65, and the benchmark US 10yr Bond yield ended  the week at 4.63%, down 13bps from last week closing of 4.76%. Yields elsewhere in the developed market space were also lower as  value buying emerged at higher yields though once again the narrative of higher for longer yields is taking hold in advanced economies  on the back of various structural issues especially concerning the huge amount of debt in advanced economies. BOJ officials indicated  a rate hike in the forthcoming policy meeting while Chinese population fell for the third straight year underscoring the challenges faced  by the Chinese economy. The surprise of the week came from Bank Indonesia which cut rates against market expectations citing growth  concerns even as its currency weakened.

 

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