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Bond yields remained in a very tight range of 8.82-8.78% this week with hardly any impact from the much awaited Vote on Account while short term rates eased marginally guided by a Reserve Bank of India press release assuring markets to address expected tightness in liquidity during March through appropriate amount of term repos. The Interim Budget reported revised fiscal deficit for FY14 at 4.6% well below Budget estimates of 4.8% and projected a fiscal deficit target of 4.1% for FY15. Net market borrowing programme for FY15 was again below market expectation at Rs 4,57,000 crore, lower than Rs 4,69,000 crore in current fiscal. Analysts remained skeptical due to perception that deferment of subsidies and curtailment of plan expenditure and interim dividends from public sector undertakings were instrumental in bettering the budgeted fiscal target.
Analysts also felt that FY15 fiscal deficit target of 4.1% is based on fairly aggressive assumptions of a nominal GDP growth of 13.4%, an increase in tax revenues rising by 18% and curtailing of plan expenditure. Alongside, FOMC minutes of January meeting suggested strong likelihood of continued tapering barring an appreciable change in the ongoing economic outlook. Economic data in the US was mixed as new homebuilding permits declined while manufacturing PMI came in stronger than expected. The US 10 year bond rose marginally by 2 bps to 2.76%. The rupee which weakened to 62.44 on reported dollar purchases by banks recovered to 62.13 ending marginally weaker from 61.93 last week. No major surprises from any of the events kept government bonds in the tight range ending 3bps lower at 8.79% from 8.82%. Five year AAA yields eased 8bps to 9.78% from 9.86%, while 10 year AAA yields rose marginally by 1 bp to 9.69% from 9.68%.
Liquidity conditions eased during the week helped by multiple term repos and a press release by RBI assuring market of providing adequate liquidity by further term repos as required. Marginal standing facility borrowings were negligible at Rs 93 crore from 18,600 crore in the previous week while liquidity adjustment facility borrowings were reported lower at Rs 28,200 crore from Rs 40,700 crore. RBI cut off at 28 day and 14 day term repos stood at 8.27% and 8.16% respectively. These term repos also helped overnight rates stay closer to repo rate of 8%. However, due to continued issuance pressure from banks, three month PSU bank certificate of deposit rates fell only marginally by 7bps from 9.75% to 9.68%, while one year bank CD rates fell 2bps to 9.73% from 9.75%.
Markets are likely to remain range-bound this week as well in listless trading. Short term rates after having spiked sharply over the last couple of week may find some respite given the strong assurance by RBI on injecting appropriate liquidity through a press release.
Mahendra Jajoo is executive director and CIO-fixed income at Pramerica Asset Managers
