Debt Outlook

March 2014

Call money rates moved in the wide range of 7.00-9.10% during the month. The rates were on the higher side earlier in the month on tight liquidity due to the two day public sector bank employee strike and on strong demand for funds from banks to meet funding requirements. The pressure on the call rates however eased as the month progressed, especially due to the government’s month-end spending and fund infusion by the Reserve Bank of India (RBI) through 9-day and 28-day term repo auctions of Rs 10,000 cr and Rs 20,000 cr on February 12 and February 14, respectively. Liquidity deficit also reduced due to inflow of funds towards coupon payments and redemption of gilts. 

Government bond prices fell during the month, with the yield on the 10-year benchmark paper 8.83%, 2023 bond ending at 8.86% on February 28, 2014, compared with 8.77% on January 31, 2014. Bond prices came under pressure due to caution ahead of the release of the US non-farm payroll numbers and domestic inflation (wholesale and retail) and industrial production data. Gilt prices fell on fears that the government's market borrowing numbers could be higher than expected at the vote-on-account scheduled for February 17. The RBI’s announcement to conduct term repo auctions in March also dented the appetite for gilts as it dashed hopes of further gilt purchases by the central bank via open market operations. High cutoff yields set at an auction of state development loans also weighed on bond prices. Prices retreated further on tracking rising US Treasury note yields and weakness in the rupee following the release of the US Federal Reserve’s meeting minutes which signaled its intention to continue tapering its monthly bond purchases.

Decline in prices was however restricted later in the month after the RBI cancelled the deferred auction scheduled on January 17, 2014 amounting to Rs 15,000 cr, indicating a comfortable government cash position and low funding requirements. The central bank also announced that gilts worth Rs 27,000 cr maturing in 2014-15 and 2015-16 had been switched to a longer tenor with an institutional investor. Encouraging domestic wholesale and retail inflation data, coupled with sporadic strength in the rupee and value buying also supported the prices. Sentiments strengthened following the end of the government’s gilt auctions for the current fiscal year. Gilts also rose after the government announced it would contain fiscal deficit for 2013-14 at 4.6% of GDP and set a net market-borrowing target of Rs 4.57 lakh cr for the next fiscal. Fiscal deficit for 2014-15 has been pegged at 4.1% of GDP. Prices got more support after the RBI infused Rs 30,000 cr through a 28-day term repo auction. Gilt prices also gained on the back of heavy purchases by some foreign banks near the end of the month.

Macro Forecast 

We expect 10 year G-sec yield to settle around 8.3 to 8.4% by March-end 2015. Tight liquidity and limited downside to policy rates during the fiscal to limit the fall in yields.

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