Debt Market Weekly Report Feb 22, 2012 Money Markets: The week ending on 17th February 12, witnessed a further deterioration in systemic liquidity as RBI announced OMO to tackle the problems. RBI on an average infused net Rs.167,151 cr daily into the system via the LAF Repo window as compared to average of Rs.111,344 cr for previous week.. Money market rates inched higher as liquidity shortfall worsened. Call rates ended at 8.91% as compared to 8.76% in the previous week. The CBLO rates ended at 8.55%, as compared to the previous week’s 7.90%. G-Sec Market RBI conducted auction for the securities 8.24% GS 2018, 8.79% GS 2021 and a 8.83% GS 2041 for a total notified amount of Rs.12,000 cr The cut-offs for securities came in at 8.31%, 8.20% and 8.60% respectively. All the three securities were fully subscribed. The bid-cover ratio was at 2.34 as against 2.13 in the previous auction. The benchmark 10-yr security 8.79% GS 2021 closed at 8.19% flat w-o-w. The g-sec market began on a cautious note; the monthly inflation numbers cheered the market with expectations of rate cut from RBI. The announcement of OMO during the week also added to the positive sentiment. However the g-sec market was disappointed with the lack of clarity over disinvestment with Government deciding to go ahead with the stake sale of ONGC whereas BHEL was pushed to next fiscal. The g-sec auction results were almost in line as per market expectations. The E-GoM (Empowered Group of Ministers) headed by the Finance Minister decided to auction stake in ONGC which may fetch around Rs.12,000 cr. However Divestment Secretary Mohammed Halim Khan said that meeting current year target of Rs.40,000 cr is almost impossible. RBI conducted OMO purchases during the week. Out of a total notified amount of Rs.10,000 cr, RBI received offers for Rs.27,165 cr of which RBI accepted offers of Rs.9,857 cr. The OIS curve witnessed marginal receiving during the week. The 5-yr OIS closed at 7.33%, lower by 5 bps from the previous week levels; while the 1-yr OIS closed at 8.10%; 4 bps lower from its previous week levels. The 1 –5 yr spread narrowed on weekly basis by 1 bp to end at -77 bps levels. Lower inflation number will see the market speculating on rate cuts by RBI and thus the OIS curve will continue to remain under receiving pressure. Corporate Bonds The corporate bond market continued to witness a lack of action as the investor and trader’s activity was limited to longer tenor papers. The 10-yr AAA bond traded at a yield of around 9.24%, 1 bp higher from its previous week closing levels of 9.23%. The yield on 1-yr AAA bond ended at 9.65%, unchanged from its previous week closing levels. The week under review did not see any major primary market issuances. FII holdings in non-infrastructure corporate bonds may increase as the unutilized limit stood at $4.97 bn as of 31st Jan and is likely to expire at the end of current month. Reliance Communications received RBI approval for refinancing its FCCB of USD 1.18 bn falling due for redemption on 1st March. The refinance is being provided by leading Chinese banks, ICBC, CDB and Exim. The loans will have an extended maturity of 7 years, with an interest cost of 7%. Macro Indicators. RBI has hiked the Bank rate from 6% to 9.50% as a one time technical arrangement in order to align the Bank rate with the MSF (Marginal Standing Facility) rate. PM Manmohan Singh stated that the Government is aiming for a 4% growth in agriculture as per the 12th Five Year Plan. PM also stated that India’s farm yield has touched a new high with food production expected to exceed 250 mn tonnes which is an all time record as of the end of 11th Five year Plan on March 2012. Finance Ministry plans to levy service tax on infrastructure companies working on Government projects. Due to the international sanctions on Iran, India’s exports of rice to Iran through the Dubai route are likely to be impacted. The monthly WPI inflation fell to 6.55% in January 2012, from 7.47% in December 2011. Global Markets Ratings agency Moody’s cut the ratings for Euro nations including Italy, Portugal and Spain. Also the rating outlook for UK & France was revised to negative from stable. The Euro zone finance ministers sealed a second bailout package for Greece worth EUR 130 bn. The Greek debt to GDP will be 121% and the private bond holders are likely to take losses of around 53.50% on the nominal value of their holdings. The NYMEX WTI crude is trading at $105 level which is a 9 month high; the Brent too crossed the $120 levels. The crude prices have surged on account of Iran tensions which has disrupted oil supplies. Iran stopped sale of oil to U K and France (who are not major clients) and threatened to stop sales to other European countries. Italy and Spanish bond auctions during the week witnessed a drop in borrowing cost and increased investor appetite. Ratings agency S&P has threatened to cut Japan’s AA- ratings incase the economic outlook worsens. Bank of Japan (BOJ) unexpectedly added JPY 10 tn ($127 bn) to its asset purchase program taking it to total JPY 65 tn. BOJ also set a goal of 1% for inflation in order to boost the economy. German exports in 2011 crossed EUR 1 tn for the first time (EUR 1.3 tn) with an increase of 11.4% over previous year – though a slow down is expected during the current year. 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