Despite Reserve Bank's intervention to reduce liquidity, the fund flush bond markets pushed the bond prices marginally. The actively traded government securities were up by 10-90 paisa across the yield curve, higher gains for securities on the long-end of the curve. Reserve Bank started the week with Rs 3500 crore sale of short-maturity papers, but over-subscription prompted it to announce another re-sale. The second auction of long-maturity papers (15-year & 24-year) activated interest at the long maturity papers. Since the re-auction on Wednesday, the two papers gained 50 paisa and 80 paisa at end of the week.
Overall, the Reserve Bank's move to reduce liquidity did not have a significant impact, barring the visible caution in between the two auctions. Even the benchmark 10-year GOI (7.40%, 2012) remained range-bound and was up 19 paisa (down 1 bps in terms of yield) during the week.
RBI's auction did reduce the interest in repo. The first two trading days, 1-day repo auctions mopped an aggregate of Rs. 49,859 crore. After auction on Wednesday, the aggregate for two days was down at Rs. 22,376 crore. Through the week, call rates also moved in a narrow range of 5.55-5.75%.
The Rupee gained 5 paisa against the dollar over the week, but was largely range-bound. The gains were capped by state-run banks' dollar purchases. This in turn has perhaps contributed to liquidity in the system as banks sell domestic currency in order to buy dollars.
Banks Cut Deposit Rates
Without waiting for the RBI to slash bank rate, the state-run banks pared their deposit rates by 25-50 basis points last week. The first mover was Bank of Baroda, followed by State Bank and then the other private sector banks. Their rationale: shrinking margins on their investments in government securities and corporate debt. Quite understandable, as the secondary market yield on top rated 3-month commercial paper has dropped below the bank rate of 6.50%. It implies that it's cheaper for companies to raise short-term money through other sources against banks.
For fixed income investors, reduction in deposit rates is not inspiring. But, the indications from the finance minister to increase the overall TDS limit from Rs. 1000 to Rs, 2500 and review the recent changes in section 88 of the Income Tax Act could well bring some cheers. However, a delayed monsoon could lead to derailment of resource planning, as funds for the draught-hit states will gain urgency.
Outlook
The hope of a bank rate cut prevails and a weak monsoon has fueled the hope further. The outlook for the bonds remains positive over the next few weeks.
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