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November 2011

Interbank call money rates moved broadly in the range of 8.35-8.90% in November due to steady demand from banks to meet their reserve requirements. Banks' borrowings also increased sharply during the month as the government conducted sale of cash management bills (CMBs) on T+0 basis, an aberration to T+1 settlement basis. However, call money rates retreated later in the month as high rates prompted banks to meet their reserve requirements from the RBI repo tender and CBLO markets.

Gilt prices ended higher in the month amid volatility, with the new 10-year benchmark 8.79% 2021 bond’s yield ending at 8.74% on November 30; the erstwhile 10-year benchmark 7.80% 2021 had closed at 8.88% yield on October 31. Gilt prices rose in the month influenced by the easing domestic inflationary worries which reduced fears of further monetary tightening by the RBI. Gilt prices also rose as the RBI conducted bought government papers from the market, reducing the systemic liquidity pressure. Sentiments were further boosted after government raised the investment limit by $5 bn for FIIs in both gilts and corporate bonds. After the hike, foreign investors can buy gilts worth $15 bn and corporate bonds worth $20 bn. Intermittently, prices also rose on falling risk appetite due to weaker cues from US and Europe.

Gains were however capped by losses made intermittently in the month by gilts. Among the factors affecting gilt prices in the month, was the sharp fall in the Indian rupee, which stoked inflationary concerns. Further fall was also witnessed on fear that the government may have to further increase its market borrowing for the ongoing financial year. This fear was ignited from the government's move to seek Parliament's approval for additional expenditure of Rs 56,800 cr on a net basis for 2011-12, under the second supplementary demand for grants. 

Macro Forecast
CRISIL Centre for Economic Research (CCER) expect 10-year benchmark yield to be at 8.5% by March-end 2011 as the government is expected to complete its market borrowings by February 2012 reducing pressure on 10-year g-sec yield in March along with a recent increase in the repo rate, the floor of 10- year G- sec yield.