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November 2013

Call money rates retreated during the month as they realigned themselves downward to the new marginal facility rate (MSF), which is now 8.75%. The central bank cut the MSF rate twice during the month (first by 50 bps and then by 25 bps) as it grew confident of reduction in exchange rate volatility in the country. In addition to MSF cut, fall in call money rates was attributed to other liquidity easing measures announced by the RBI viz., providing additional liquidity through term repos of 7-day and 14-day tenor. Liquidity in the banking system also improved due to redemption of cash management bills during the month. However, further rise in call rates was capped due to demand from banks to cover their mandatory reserve requirements.

Government bond prices surged in the month as sentiment improved after the RBI continued with unwinding of its liquidity tightening measures initiated in mid-July. The yield on 10 year benchmark 7.16%, 2023 bond fell to 8.62% on October 31 from 8.77% yield on September 30, 2013. The RBI lowered the MSF rate twice (75 bps in total) in the month to 8.75% and also provided additional liquidity through term repos of 7-day and 14-day tenor for a notified amount equivalent to 0.25% of NDTL of the banking system. Gains were further boosted after this facility was later extended to 0.5% of NDTL in the second quarter monetary policy review on October 29. Appreciation in the rupee during the month supported the rise in bond prices. Some gains in bond prices were also seen due to bond buyback of Rs 10,000 cr in the first week of the month, India's trade deficit numbers for September falling to a 30-month low, and on hopes that the RBI or the government may soon announce steps to support debt inflows.

On the global front, hopes that the US Fed would have to defer the tapering of its monthly $85 bn asset purchase programme due to the US government shutdown earlier in the month and weak US non-farm payrolls data for September augured well for domestic bond prices. Expectation of portfolio inflows after US lawmakers brokered a deal to raise the US government's borrowing limit and to end the partial federal government shutdown also induced gains in domestic bonds. 

However, further rise in bond prices was capped as headline (WPI) and retail (CPI) inflation for September remained at elevated levels. Supply of gilts lined up in the weekly auctions also capped the rise in bond prices.
Debt Market Overview - Nov 2013

Macro Forecast
CRISIL Centre for Economic Research (CCER) expects 10 year G-sec yields to settle around 7.8 to 8% by March-end 2014. Tighter liquidity, rising inflationary expectations and the lower likelihood of further repo rate cuts until March 2014 are expected to keep government bond yields firm.