A fall in inflation and comfortable liquidity saw debt markets register marginal gains this week. The yield on the 10-year benchmark GOI security (2013 9.81%), after touching a low of 5.78 per cent on Wednesday, ended the week at 5.79 per cent—down 2 basis points (bps) over the week. The fall in the yield was corrected once the Reserve Bank of India conducted an open market operation (OMO) on Thursday. The inflation, based on the wholesale price index (WPI), moved down from 6.03 per cent for the week-ended May 3, 2003 to 5.9 per cent in the week-ended May 10, 2003.
The central bank was able to raise Rs 5,367 crore through the OMO of 6.72% 2014 bonds. The RBI received 215 bids, out of which 206 were accepted at a cut-off price of Rs 106.2. But the bidding amount was Rs 5,467 crore, below the expected target of Rs 5,500 crore, indicating low enthusiasm about this auction. The OMO was specifically conducted to check excess liquidity in money markets.
But in spite of the OMO, there was ample liquidity in the system. Late demand to cover reserve positions on the last day of the reporting cycle—on Friday—pushed up call rates to above 5 per cent towards the closing of trade. However, call rates remained in 4.75-5 per cent range during the week. The average bids at the daily repo auction were higher by 50 per cent compared to the previous week indicating comfortable liquidity in the system. The average daily volumes in the debt market fell by 13 per cent.
As for forex markets, the rupee turned weaker by 18 paise against the dollar during the week to end at Rs 47.085/$. This was largely due to heavy dollar demand in the forex market. In the meanwhile forex reserves have already touched $79 billion—leading to excess liquidity in the debt markets in the recent month. The six-month forward premium on the dollar rose marginally from 1.05 per cent the previous week to 1.1 per cent this week.
The RBI has proposed to put state government securities for sale on-tap as against going the usual auction route. This will be done to raise Rs 7,000 crore towards the debt-swap programme. The idea is to retire high cost debt and substitute it with market loans at lower interest rates. Hence, this will reduce interest cost on public debt held by states.
The state government paper is likely to be of 10-year maturity with a fixed coupon of 40-50 bps higher than the comparable central government security.
Outlook
In the coming week debt markets would be guided by the scheduled auction (Rs 9,000 crore) of 5-10 year and 15-19 year and above securities. Inflation will also have a role to play, as a further fall could trigger a revival of the positive sentiment in bond markets.
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