Credit Market Pricing Risk

RBI did its bit in improving sentiment toward lower interest rates, and SBI by announcing that it would link deposit rates to the repo rate. Now will this become a bank wide phenomena needs to be seen. What will be the impact on saving? Blind issue. But if the purpose was to bring down credit spreads as defined by the difference between high rated AAA govt bonds and lower rated corporate debt then this chart from a recent Bloomberg article was a good highlight.

In light of this today's headline news put DHFL back in limelight. But the real news is that the market determines interest rates for these bonds, and right now the market is asking for a 30% discount. So the RBI can try to impact market rates but at the most might only bring down a little the governments borrowing costs. 

But for how long? The bond yield chart shows that the Indian 10 year bonds are now flat trading at 7.40-7.70 for weeks. Prices remain in the larger rising channel and the next move should be for yields to move up and not down, the exact opposite of what the market thinks here. Bond yields have been consolidating in wave II of 3 long term. III of 5 up is next when it starts. Wave II has held the 61.8% support for now, and a small trendline of the swing lows can be made at the bottom of wave II as support at 7.45%

And while the RBI is trying to lower rates for borrowers in general, it is still in fighting mode for issues like ILFS, it would appear that postponing the recognition of bad loans was only to defer the financial risk that the first chart on top is already telling us exists ahead. It tightens liquidity available for the corporate sector that is now over-levered as a % of GDP.