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April 2012

Call money rate, which hovered in the 8.30-9.5% range for most of March, rose sharply towards the end of the month to close at 14.00-15.00% on March 30 compared with around 8.50-9.0% at the end of February. The call rates rose sharply due to advance tax outflows (around Rs 50,000-60,000 cr) from corporates and strong demand from banks due to closing of the financial year. The continuing tight liquidity scenario in the banking system also exerted pressure on call rates. To ease the liquidity squeeze, the RBI lowered cash reserve ratio (CRR) by 75 bps to 4.75%, from March 10; the move infused Rs 48,000 cr into the banking system.

Gilt prices plunged during the month on oversupply concerns after the government, in the Union Budget, announced higher than expected borrowing numbers and higher fiscal deficit estimates for FY 13. The government pegged net market borrowing at Rs 4.79 lakh cr in FY13 to fund around 93% of FY13 fiscal deficit which was targeted at Rs 5.14 lakh cr or 5.1% of GDP in FY13. A higher than expected front loading of gilt auction in the first half of FY13 also negatively affected market sentiments. The government will borrow Rs 3.7 lakh cr on gross basis in April-September, which is 65% of the total Rs 5.69 lakh cr gross borrowing for FY13. Meanwhile the government plans to set up a separate debt management office (DMO) to manage the government’s debt and is expected to table the legislation soon. Sentiments were further damped after the RBI left the repo rate and CRR unchanged in its mid-quarter policy review during the month, and refrained from giving any indication of monetary easing in the near future citing upside risks to inflation. Gilt prices retreated further as the central government’s ruling party put up a weak show in UP elections, which raised the likelihood of  reform processes getting stalled going ahead.  The yield on 10-year benchmark 8.79% 2021 closed at 8.57% yield on March 30, up 37 bps compared with 8.20% yield on February 29. 

However, further losses for gilts were capped as some participants bought securities to enhance the valuation of their portfolio towards the end of the financial year. Absence of fresh supply of securities during the second half of March along with global risk aversion also lent some support to bond prices.

Macro Forecast
Expectations are that yield on the benchmark 10-year paper will be in the range of 7.3% to 7.5% by the March-end 2013. Although government borrowing pressure would remain high during the year, crowding out of private sector investment is unlikely due to weak economic activity. Yields will soften due to (a) lower inflation expectations and (b) monetary easing by RBI.