Indian markets witnessed a lot of activity this week. Despite advance tax outflow, the liquidity remained comfortable. The liquidity concern over redemption of Resurgent India Bonds (RIB) also got over as RBI assured that it would be met directly by RBI and the balance requirements of SBI will be provided by the apex bank. Then, RBI slashed the NRE rupee deposit rate by 1.5 per cent and banned Overseas Corporate Bodies (OCB) from trading in secondary market in India. All these kept the debt markets volatile. The yield on the 10-year benchmark (GOI 2013, 7.27%) after touching a low of 5.29 per cent, inched up to close at 5.31 per cent on Friday – down just 0.01 per cent over the week.
On Monday, the trading volume dipped to below Rs 2,000 crore ahead of the advance tax outflow. Volumes recovered in the following trading sessions, as liquidity remained comfortable. High liquidity was widely reflected in the average daily subscription to RBI repos, which stood at the same level as last week – over Rs 16,000 crore. Call rates too remained below the repo rate of 4.5 per cent over the week.
The yield on the shorter tenure bonds fell more than that on the medium- and long-tenure bonds. Thus, the yield curve became slightly steep this week compared to last week. This was largely due to the fall in yield on treasury bills. This week, RBI raised the cut-off price at the 364-day and 91-day treasury bill auction. Consequently, the yield on the 365-day T-bills slipped to 4.62 per cent from 4.70 per cent, and that on the 91-day T-bills fell to 4.58 per cent from 4.63 per cent over previous week.
The rupee touched a new low of Rs 45.98/$ on Thursday largely on account of the new announcements made by the RBI this week. The RBI has slashed the interest rate ceiling on the NRE rupee deposits, which could affect the liquidity in the market. It has now been capped at 1 per cent over the London Inter-bank Offer Rate (Libor). This is a sharp reduction from the earlier ceiling of 2.5 per cent over Libor, announced on July 17.
This move is a signal to NRIs that RBI does not want them to roll over their RIB money into NRE deposits. Last week, SBI announced two deposit schemes aimed at retaining the $5.5 billion RIB redemption due on October 1, 2003. Further, RBI has also banned OCBs from primary market. This is another step to check huge forex inflows especially in the light of the burgeoning forex reserve, which touched $87 billion as on week ended September 5, 2003. However, the rupee gained 4 paise on Friday to close at Rs 45.94/$ on RBI's comment that it will ensure a smooth outflow of $5.5 billion for redemption of RIB.
Outlook
The RBI's assurance that RIB redemption would not affect liquidity has bolstered market sentiment. With liquidity remaining comfortable and no scheduled auction left for the month, the outlook is favourable for the bond market. All eyes are now set on the government's borrowing calendar for the second half of this fiscal year, which it will issue very shortly. The government has so far raised 52 per cent of its total borrowing target of Rs 1,66,000 crore for the current fiscal.
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