Interbank call money rates moved in the range of 7.40-7.85% during March 2013. However, rates sky-rocketed on the last trading day of the month (March 28, 2013) to close at 17.00-18.00% due to increased borrowing by banks at the end of the financial year. Increase in demand for funds due to closure of banks on March 27 (Holi), 29 (Good Friday), and April 1(banks' annual closing of accounts), also pushed the rates upward. Call rates were also pressurized during the month due to tightening of systemic liquidity amid strong demand from banks to meet quarterly advance tax outflows. However, the call rates moderated in alignment with the repo rate following the rate cut by the Reserve Bank of India (RBI); the central bank lowered its key repo rate by 25 bps to 7.50% from 7.75% in its mid-quarter monetary policy on March 19, 2013.
Indian government bond prices fell in the month, with the yield on the 10-year benchmark 8.15%, 2022 bond rising to 7.95% on March 28, compared with 7.87% on February 28. Sentiments were hit earlier in the month on concerns that the Union Budget may not be successful in reducing the threat to India's sovereign rating downgrade. Gilt prices fell later in the month after a higher-than-expected rise in India's industrial production and high retail inflation in February damped hopes of a rate cut by the RBI. India’s industrial output came in at 2.4% in January 2013 compared with -0.5% in the previous month, while retail inflation measured by the consumer price index came in at 10.91% in February 2013 versus 10.79% in January 2013. The central bank however cut its interest rate by 25 bps in its policy review. Gilt prices fell despite the rate cut as the RBI said the headroom for further monetary easing remains quite limited due to high current account deficit (CAD) and inflationary expectations. Yields also moved upwards on news of commencement of the government's borrowing in the first week of April 2013, with the weekly auction size of Rs 15,000 cr. The government said that it will borrow 59% of its gross borrowing aim for 2013-14 or Rs 3.49 lakh cr during April-September 2013. Bond prices also retreated on concerns over domestic political instability after the DMK withdrew support to the Central government to protest the government's stand on the issue of Sri Lankan Tamils.
Further fall in government bond prices was however capped due to year-end purchases by banks to shore up portfolio valuations. Bonds also gained after the government rationalised norms for foreign institutional investors (FIIs) to invest in domestic debt. The government removed the sub-limits within the US$25 bn limit for FII investment in government securities, and US$51 bn limit for corporate debt; it also introduced an on-tap system for allocating debt limits to FIIs, replacing the existing auction mechanism. Prices also got support from intermittent bond purchases by the RBI via open market operations (OMOs) in the month. Hopes of monetary easing by the central bank due to lower domestic economic growth and fall in core inflation also helped gilt prices cap losses for the month. India’s economic growth for the October-December 2012 came in at 4.5%, the lowest in the past 15 quarters, and compared with 5.3% in the previous quarter. Meanwhile, the domestic core inflation declined to 3.8% in February 2013, the lowest in the past three years and compared with 4.1% in the previous month. Intermittent value buying also pushed up the prices to a certain extent.
The budget pegged net market borrowings for 2013-14 at Rs 4.84 lakh cr, higher than Rs 4.67 lakh cr in 2012-13. This may put pressure on 10- year G-sec yields. We expect 50-75 basis points (bps) cut in the repo rate in 2013-14, which will lower the floor for G-sec yields. Moreover, easing inflation and continued OMOs by the RBI will also keep yields subdued.