BOK meeting preview; RBI to support INR bonds

Group Research - Econs, Ma Tieying / Apr 08, 2020

The BOK may cut rates by 25bps as early as Thursday. Rise in Indian bond yields may require RBI support.

Photo credit: Unsplash Photo

South Korea: BOK rate cut on Thursday

The Bank of Korea is expected to cut rates by an additional 25bps in 2Q, as soon as the policy meeting tomorrow. The COVID-19 situation in South Korea has begun to stabilise and the financial market stress has eased after the BOK’s 50bps emergency rate cut in March. Nonetheless, external environment has deteriorated sharply over the past one month, due to the intensifying COVID-19 and lockdown/shutdown in US, Europe and Southeast Asia. Lower interest rates are needed to mitigate the impact of external income shocks on corporate/household balance sheet.

A further 25bps cut in the benchmark repo rate is expected to push down the 3M CD rate below the 1% mark, to about 0.9%. The GFC-like liquidity support measures adopted by the BOK, such as unlimited repo operations, should also help to compress the short-term rates. Long-term yields may have bottomed, however, given the expansion in fiscal policy and the increase in KTB issuance. The KRW11.7tn supplementary budget passed in March requires additional bond issuance of KRW10.3tn. A second supplementary budget worth KRW7tn is being drafted, according to media reports.

On the FX front, the KRW is consolidating in the 1200-1250 range vs the USD after a heavy sell-off in March. The BOK has entered into a USD60bn currency swap arrangement with the Fed to strengthen reserve positions, and relaxed the macroprudential measures aimed at curbing capital inflows during the post-GFC period (e.g., cap on banks’ FX forward positions, levy on foreign currency borrowings). The stabilisation of the KRW will, in turn, provide the needed leeway for the BOK to further lower domestic rates.

India: Rise in bond yields may require RBI support

India’s bond issuance calendar is set to be heavy over the next few months, even before factoring in any COVID-19 related spending. The central government plans to raise 63% of the FY21 issuance i.e. INR 4.9trn in 1HFY21 (Apr-Sep20). This implies weekly offerings of INR 190-210bn. Add to this is INR 3trn worth T-bills, and state bonds of INR 1.3trn (+15% yoy) in 2Q20. This heavy supply pipeline, in midst of low volumes and spike in volatility (due to lockdown restrictions) have driven 10Y bond yield (generic) up ~30bps this month. Trading hours in FX and bond markets have been shortened to quell volatility. Borrowing costs of states also rose in Tuesday’s auction. After rejecting few bids, they raised INR325bn vs planned INR375bn.

With an eye on the upcoming issuance, the RBI is helping to ease states’ ability to borrow. States’ ways and means advances (WMA) limit was raised by 30% last week. On Tuesday, the number of days that states/ UTs can be in overdraft was extended to 21 days vs 14 days earlier, to tide over short-term funding mismatches. The centre has reportedly given states the leeway to frontload as much as 50% of their annual borrowings, according to the local press.

Taking a leaf of the central bank’s response to a (sharper) squeeze in risk-free yields back in 3Q18, expectations are high for a replay. Back then, a steady stream of bond purchases (INR2.5trn) had helped tame yields. The present juncture of weak global sentiments, portfolio outflows and banks’ worries over the supply pipeline have left yields firm, despite a host of liquidity measures announced in the past few weeks. Participants have pinned their hope on the central bank’s support not only via secondary market purchases, but also in primary auctions (permitted under extraordinary circumstances). Signs of support will help ease 10Y yields back towards 6.2% and below.


Disclaimers and Important Notices

The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only.  It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose.  Opinions and estimates are subject to change without notice.  The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information.  Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities.  Foreign exchange transactions involve risks.  You should note that fluctuations in foreign exchange rates may result in losses.  You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.

The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such.  Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.

The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.

DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.

To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof. 

The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.  The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.