Debt Market Weekly Report Jan 30, 2012 Money Markets: The week ending on 27th January 12, witnessed a marginal improvement in the systemic liquidity position. RBI on an average infused net Rs.140,309 cr daily into the system via the LAF Repo window as compared to average of Rs.152,316 cr for previous week., and without the impact advance tax collections. Money market retained elevated levels as the liquidity shortfall continued despite some marginal improvement. Call rates ended at 9.15% as compared to 9.27% in the previous week. The CBLO rates ended at 8.69%, as compared to the previous week’s 8.52%. G-Sec Market RBI conducted auction for the securities 8.19% GS 2020, 9.15% GS 2024 and a 8.97% GS 2030 for a total notified amount of Rs.13,000 cr The cut-offs for securities came in at 8.37%, 8.45% and 8.66% respectively. The security 8.19% GS 2020 was devolved on primary dealers to the extent of Rs.775 cr from a notified amount of Rs.4,000 cr. The bid-cover ratio was at 1.96 as against 2.15 in the previous auction. The benchmark 10-yr security 8.79% GS 2021 closed at 8.35% a rise of 17 bps w-o-w. The g-sec market opened on a cautious note ahead of policy announcement. The g-sec market cheered the 50 bps CRR cut as majority of the g-sec market was not expecting a CRR cut. The 10-yr g-sec yields reached an intraday low of 8.075% post the announcement. However during the post-policy discussion RBI Governor mentioned that they are not sure of continuing with OMO since the CRR cut would infuse additional liquidity into the system. The g-sec markets reacted sharply to this statement and witnessed a heavy selloff with the g-sec yields touching highs of 8.37%. The auction results too were not encouraging as the 8-yr security was devolved on the primary dealers. In the monetary policy RBI mentioned that global environment is uncertain and upside risks to inflation persist due to global crude prices and rupee depreciation. RBI also added that the fiscal slippages and tight liquidity is a cause of concern. Whereas the investment and capital flows have slowed down. The overall stance was that the rate cycle has peaked and there would be probable emphasis on interest rate easing in the near future. The OIS curve continued to rise as paying pressure increased post-policy announcement. The 5-yr OIS closed at 7.34%, higher by 6 bps from the previous week levels; while the 1-yr OIS closed at 8.14%; 11 bps higher from its previous week levels. The 1 –5 yr spread narrowed on a weekly basis by 5 bps to end at -80 bps levels. The OIS curve is likely to mirror the movement in underlying g-sec with receiving happening at elevated levels. Corporate Bonds The Corporate bond market activity continued to be muted with lower volumes and range bound movements as participants abstained from taking further positions ahead of the monetary policy. The 10-yr AAA bond traded at a yield of around 9.30%, 5 bps higher from its previous week closing levels of 9.25%. The yield on 1-yr AAA bond ended at 9.50%, 5 bps higher from its previous week closing levels of 9.50%. In the primary market there was no major debt paper issuance during the week. The Department of Economic Affairs is believed to be pitching for cut or even a withdrawal of withholding tax on interest payment of corporate bonds in order encourages investments and development of a vibrant debt market. The Government is considering increasing the investment limit of infrastructure bonds from the current Rs.20,000 cr to Rs.50,000 cr. Macro Indicators. RBI released the 3rd quarter review of Monetary Policy for 2011-12 on 24th Jan 2012. The key policy rates Repo, Reverse Repo & Marginal Standing Facility were kept unchanged at 8.50%, 7.50% & 9.50%. Cash Reserve Ratio is cut by 50 basis points from 6.0% to 5.5% with immediate effect, injecting Rs.32,000 cr into the system. RBI cut the 2011-12 GDP growth estimate to 7% from 7.6% earlier. Whereas the 2012 March-end inflation was projected at 7%. RBI has kept the M3 money supply growth projection for 2011-12 unchanged at 15.50% whereas the projection for non-food credit growth has been revised lower at 16% The monthly WPI inflation fell to 7.47% in December, from 9.11% in November 2011. The primary articles based weekly inflation came to 1.89%, 0.58% lower than its previous week levels of 2.47%. Food inflation fell to -0.98% for the week ended January 14th from -0.42% in the previous week. Global Markets The Commerce Department released the US Q4 GDP growth figures at 2.80%. Lower than the market estimates of 3%, however higher than previous qtr growth rate of 1.80%. The growth has been on account of rising consumption and inventories; however there was a cut back in business spending. The US Federal Reserve kept the benchmark Fed Target rate unchanged at 0 – 0.25%. Whereas the first time published interest rate forecast showed a possible hike in rates only by late 2012. The US Fed chairman Ben Bernanke stated that they may consider another round of asset purchases incase the labor market continues to be stagnant. The markets expect that incase the Fed announces QE3 then it would most probably be for mortgage securities. Ratings agency Fitch downgraded Italy by 2 notches to ‘A-’ from ‘A+’; Spain also by 2 notches to ‘A’ from ‘AA-’. Apart form Italy and Spain, Fitch also downgraded Belgium, Slovenia & Cyprus. The downgraded nations Italy, Belgium & Spain are scheduled to auction $29 bn worth of debt securities in the coming week. Anonymous sources stated that the Greek bond investors have agreed to a lower coupon of 3.60% on the new 30-yr security post debt-swap. French President Sarkozy has stated ahead of the Brussels summit that Euro crisis is showing signs of stabilizing as Euro leaders have responded well to the debt situation. Japanese exports fell for the 3rd consecutive month in Dec 2011 as Japan posted the first annual trade deficit in last 31 years of JPY 2.49 tn. 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