Call money rates mostly traded above the RBI’s repo rate of 8% for most part of the month due to increased borrowings by banks towards the end of the financial year and due to outflows towards corporate advance tax. The call rates spiked sharply on last session of the month to end at 10.00-10.50% on March 28 as compared with 7.75-7.90% on February 28 as most state-owned banks did not lower their lending rates, as the financial year came closer to its end. However, further rise in call rates was restricted at regular levels as the RBI periodically conducted repo auctions to ease liquidity in the system. Finally, call rates ended lower tracking the sporadic fall in CBLO rates, the government’s Rs 15,000 cr and Rs 5,000 cr gilt re-purchase on March 18 and March 24, respectively, and on payment of subsidies to oil marketing companies.
Government bond prices rose during the month, with the yield on the 10-year benchmark paper 8.83%, 2023 bond falling to 8.80% on March 28 from 8.86% on February 28. Sentiments were boosted following a rise in the rupee after government data showed that the country’s CAD had fallen to its lowest level in eight years. Decline in domestic GDP growth to 4.7% in Q3FY14 compared with 4.8% in Q2 FY14 also augured well for gilts as it raised hopes of monetary easing by the central bank. Fall in both wholesale and retail inflation also augured well for Indian gilts. Sentiment for gilts was also propped up by comfortable liquidity conditions as a result of the RBI’s gilt repurchase auctions conducted during the month.
However, any further rise in gilts was restrained on the back of subdued participation by India’s state-owned banks; as the financial year draws to a close, the banks are in a cautious mode ahead of the release of the government’s borrowing plans on March 28 for the next fiscal. US Fed Chief Janet Yellen’s announcement that the US central bank may hike interest rates as early as March-April 2015 also weighed on the prices. Earlier in the month, caution ahead of the release of domestic consumer and wholesale inflation figures and profit booking also affected bond prices.
We expect 10-year g-sec yield to settle around 8.2 to 8.4% by March-end 2015. Tight liquidity and limited downside to policy rates during the fiscal to limit the downside to yields.