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May 2012

Call money rates retreated to 8.30-9.10% in April compared with 8.30-9.50% in March due to improvement in the liquidity situation and after the RBI reduced the repo rate by 50 bps to 8% in its Annual Monetary Policy for 2012-13. Inter-bank rates also fell as most banks borrowed at cheaper rates from RBI’s repo tender and the CBLO market to meet their reserve needs. However, a sharp fall in the call rates was restricted due to a strong demand from banks to meet their reserve needs.

Gilt prices continued with their decline during the month on fresh supply of gilts after the government commenced gilt auctions for FY13. The RBI guidance on future rate reductions being constrained on account of a loose fiscal policy and suppressed inflationary risks led to yields moving up after the policy review. The yield on 10-year benchmark 8.79% 2021 closed at 8.67% yield on April 30, up 10 bps compared with 8.57% yield on March 30. 

The government is widely expected to auction a new 10-year gilt in the coming weeks, as the current 10-year benchmark has reached its unofficial limit of Rs 70,000 cr in outstanding stock in the market; this would render the present benchmark illiquid.

We expect yield on the benchmark 10-year paper to be range bound in the near term with the possibility of RBI OMO program likely to cap any sharp upward spikes.