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March 2013

Interbank call money rates moved in the range of 7.65-7.90% during February 2013. Rates were on the lower side earlier in the month due to moderate demand for funds from banks. However, rates picked up during the month as demand for funds from banks rose on reporting fortnights. The two-day nationwide strike by trade unions on February 20 and 21 that also saw participation by employees of major public sector undertaking (PSU) banks also pushed up call rates. Liquidity in the system was also constrained due to outflows related to service tax, excise and customs duties. Further rise in call rates was however capped due to liquidity infusion of Rs 18,000 cr into the banking system following the cut in cash reserve ratio (CRR) - which came into effect from February 9, 2013 - by the Reserve Bank of India (RBI).

Indian government bond prices rose during the month, with the yield on the 10-year benchmark 8.15%, 2022 bond falling to 7.87% on February 28, compared with 7.91% reported on January 31. Prices gained earlier during the month as a weaker-than-expected gross domestic product (GDP) estimate from Central Statistics Office (CSO) built hopes of RBI implementing a rate cut in March 2013; the CSO estimated India’s growth rate for 2011-12 to be 6.2% (from 6.5% earlier), the lowest since 2002-03. Weak industrial production data for December 2012 and higher-than-expected decline in January 2013 wholesale price index (WPI) inflation also strengthened hopes of a rate cut by the RBI. India’s industrial production came in at -0.6% in December 2012 while WPI inflation came in at 6.62% in January 2013. Prices rose further after the RBI announced (on February 15, 2013) purchase of up to Rs 10,000 cr worth of bonds under open market operations (OMOs). Sentiment for bonds also improved after the central government cancelled the Rs 12,000 cr debt sale auction on February 22, 2013 and reduced the market borrowing for FY13 based on its review of cash position and funding requirements. Intermittent value buying and short covering also pushed gilt prices up to a certain extent.

Further rise in prices was however capped after the government, in the Union Budget, announced a higher-than-expected gross market borrowing for 2013-14; the government had announced to borrow Rs 6.29 lakh cr on a gross basis in the next fiscal year, up Rs 71,000 cr from the revised estimate of Rs 5.58 lakh cr for the current fiscal year. However, the government later clarified that its gross borrowing will not include a planned buyback of bonds worth Rs 50,000 cr, and its actual borrowing requirement for the next fiscal will be Rs 5.79 lakh cr on a gross basis. Prices also declined on the likelihood of the RBI refraining from cutting the repo rate at its next policy review following the rise in January 2013 consumer price index (CPI)-based inflation. RBI Governor Mr. D. Subbarao said that there was limited room for further monetary easing as inflation is expected to remain range-bound - a comment that also dented hopes of a further rate cut by the central bank.

Debt Market Review March 2013

Macro Forecast
We expect 10 year G-sec yields to settle at 8.0% by March-end 2013 vis-à-vis 8.1% forecast earlier. We expect another 50-75 basis points repo rate cut in FY 2013-14. This will further lower the floor for G-sec yields. Moreover, a lower inflationary expectations and continued OMOs by the RBI will also keep yields low.