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G-Secs: Yields rise on rising government borrowings

June 30, 2009 18:37 IST

The government of India has programmed to raise Rs 241,000 crore, but due to scaling up of issuance size of securities, will end up raising Rs 259,000 crore in April-September 2009.

The government of India has raised the issuance size of securities for the sixth sequential issue by Rs 3,000 crore (Rs 30 billion) each, compared to Rs 12,000 crore (Rs 120,000) planned for each issue between May 15 and June 26, 2009.

Thus, the borrowing of the government has increased to Rs 259,000 crore (Rs 2,590 billion) for the first half of 2009-10, compared to Rs 241,000 crore (Rs 2,410 billion) originally planned for the period.

The government of India has raised Rs 146,062 crore (Rs 1,460.62 billion) in the current fiscal up to June 19 through 11 issues for the notified amount of Rs 147,000 crore (Rs 1,470 billion). Thus, the government has accomplished 40.63 per cent of the planned market borrowing of Rs 361,782 crore (Rs 3,617.82 billion) for the fiscal year 2009-10.

India's industrial production rebounded 1.4 per cent in April 2009, snapping the fall for the last two months. Over and above, the CSO has also revised the growth for March 2009, from the steep fall of 2.3 per cent reported earlier to a mere 0.8 per cent. It has also scaled up growth for January 2009 from 0.4 per cent reported earlier to 1 per cent in its second revision.

Thus, industrial production grew by 2.6 per cent in 2008-09, compared to the 2.3 per cent growth reported earlier.

Strong domestic demand helped the revival of industrial production, despite exports continuing to slump in April 2009. The three fiscal stimulus packages, amounting to 7 per cent of the GDP, announced by the government, and various steps taken by the RBI along with heavy election spending bolstered the consumer demand.

The yields on 10-year benchmark government stock 6.05 per cent maturing in 2019 increased 33 bps during the period under review (June 8-19, 2009). The yields consistently rose and zoomed 31 bps in the week ended June 12, due to concerns over rising crude oil prices and uncertainty over the actual size of government borrowing for the current fiscal year 2009-10.

However, during the second week of the fortnight, the trade on the 10 year paper eased with short dated securities gaining momentum. Some retrenchment in crude oil prices, surplus liquidity and flow of foreign funds in domestic debt instruments improved sentiments, which restricted the rise in yield on 10 year paper to mere 4 bps during the second week.

In fact the yield on most widely traded 6.07 per cent bonds maturing in 2014 declined 2 bps during the week ended June 19, compared to a 28 bps increase in the week ended June 12, 2009.

The annual rate of inflation, calculated on point to point basis, stood at -1.61 per cent for the week ended June 6, 2009, as compared to 0.13 per cent for the previous week and 11.66 per cent a year ago. Inflation has dipped to negative for the first time since 1976-77, thanks to the higher base effect. The WPI based inflation recorded a fall of 1.1per cent in 1975-76.

The banking system continues to be awash with surplus liquidity, with the rising inflow of deposits and the stressed growth of bank credit. The banks have been parking excess cash with central banks under LAF and in government securities and the call money rates have been moving below the reverse repo rate.

However, the access to the CBLO market, where entities like insurance companies and mutual funds, etc, lend at lower rates, have further eased pressure on call rates. It is expected that the call rate would continue to rule at a lower level until banks speed up lending to the corporate sector.

The government of India has continued to increase the issuance size of securities more than the planned level for sequential sixth week, while there is uncertainty about the exact borrowing for the current fiscal. Although the government is mooting a divestment of its stake in PSUs, which can reduce its dependence on market borrowing to meet the fiscal gap, only the Budget can impart clarity on the issue.

Investors are awaiting the revised borrowing plan to be announced during the full Budget for 2009-10 on July 6, 2009. Until then, the yields would continue to trade range-bound.

G-Secs: GOI continue to scale up issuance size of securities

However, the government of India was considering taking up a comprehensive review of the administered interest rate regime, covering rates on small savings schemes, savings bank rate, etc, on demand from RBI and other banks.

The higher rates on small saving schemes acts as a floor to the bank deposits rates and restricts the banks' ability to cut interest rates. The cut is likely to enhance the flow of deposits towards banking system, which provides the option to withdraw deposits prematurely, in addition to luring interest rates.

The higher growth of deposits with banks ensue a greater demand for government securities and augurs for lower yields.

India's industrial production rebounded 1.4 per cent in April 2009, snapping the fall for last two months. Over and above, the CSO has also revised the growth for March 2009 from the steep fall of 2.3 per cent reported earlier to mere 0.8 per cent fall.

Meanwhile, it has also scaled up the growth for January 2009 from 0.4 per cent reported earlier to 1 per cent at the second revision. Thus, the industrial production grew by 2.6per cent in 2008-09, compared to 2.3 per cent growth reported earlier.

The strong domestic demand helped the revival of industrial production, despite exports continuing to slump in April 2009. The three fiscal stimulus packages, amounting to 7 per cent of the GDP, announced by the government, and various steps taken by the RBI along with heavy election spending bolstered consumer demand.

Bond yields rise due to rising crude oil prices and uncertainty on government borrowing

Bond yields increased from 6.56 per cent on June 8 and touched 6.65 per cent on June 9, as supply concerns exaggerated after the prime minister said there was scope to enhance public spending amid burgeoning fiscal deficit.

Bond yields increased to a two month high of 6.79 per cent on June 10, after investors trimmed their position to make space for Rs 150,00 crore (Rs 1,500 billion) worth of auctions of date securities.

Bond yields increased to 6.89 per cent on June 11, recording a rise for the fifth sequential session, as investor sentiment was impacted due to uncertainty over the actual size of the government borrowing for the current fiscal. Meanwhile, the RBI offered higher cut-off yield for the securities auctioned today further affecting the sentiments.

The payment of Rs 22,000 crore (Rs 220 billion) toward discharge of the 5.48 per cent GS 2009 improved the cash condition; thus yields ended unchanged at 6.89 per cent on June 12. However, there was no trade reported in 10 year benchmark paper on June 15, 2009.

The yield ended almost flat at 6.89 per cent on June 17 as against the previous close of 6.89 per cent on June 16. The yield increased by 2 bps to 6.91 per cent on June 18 as the some traders trimmed their position ahead of the auction of dated securities worth Rs 15,000 crore (Rs 150 billion) on June 19.

 

Meanwhile, traders shifted focus to short dated securities from the second week onwards.

The yield on most widely traded federal paper 6.07 per cent maturing in 2014 increased by 22 bps for the period (June 8-19) owing to concerns over the government borrowing programme for the current fiscal. The yield stood at 6.63 per cent on June 15, jumped 4 bps to 6.67 per cent in the next trading session and dipped to 6.59 per cent on June 18 as the central bank set better-than-expected prices at a buyback auction.

However, the yield spiked to 6.64 per cent on June 19, as traders expected that government would further scale up the issuance size of securities.

Corporate bonds

The total number of corporate bonds reported during the period under consideration -- June 8-18, 2009 -- was 9,490 of Rs 17,590 crore (Rs 175.9 billion) over the previous fortnight ending June 5, 2009, with total 21,455 trades of Rs 8,868 crore (Rs 88.68 billion). The figure includes bonds traded on reporting platforms of the BSE, NSE and FIMMDA (at SEBI).

The trades on BSE and NSE comprises OTC trades and trades done on the exchange, while in the case of FIMMDA, figures comprise only OTC trades reported. During the period under review, the total number of trades on FIMMDA were 419 for Rs 3,876 crore (Rs 38.76 billion). The BSE and NSE reported a volume of Rs 1,729 crore (Rs 17.29 billion) and Rs 3,885 crore (Rs 38.85 billion) respectively for the period.

The bond yields rose in thin trade on June 8, tracking government bond yields. As the market faced an increased supply of corporate bonds, the total volume traded declined to Rs 581.04 crore (Rs 5.81 billion) from Rs 971.74 crore (Rs 9.71 billion) on June 4, 2009.

Thereafter, the yields rose on June 11, tracking government bond yields, which had spiked because of uncertainty about future debt supplies and concerns of a higher-than-expected market borrowing. The total traded volume rose to Rs 797.04 crore (Rs 7.97 billion).

The yields ended slightly higher on June 12, as better-than-expected industrial production data reinforced expectations of an economic recovery and a possible end to the monetary easing by the central bank. The otal volume traded on June 12 was Rs 367.36 crore (Rs 3.67 billion), lower than Rs 797.04 crore (Rs 7.97 billion) on June 11.

Corporate bond yields are likely to track government bond yields. Going further, the yields eased slightly on June 15, tracking government bond yields which fell on speculation the government was considering cutting interest rates on its small savings scheme.

Ample liquidity in the system encouraged investors to build positions and pulled the yields southward. The total volume traded also declined to Rs 2,041.97 crore (Rs 20.42 billion) on June 16, 2009. The bond yields eased on June 18, tracking government bond yields, as the central bank set better-than-expected cutoffs at a buyback auction.

Central and state government securities

On June 11, 2009, the RBI conducted the auction for '6.04 per cent GS 2014,' '7.94 per cent GS 2021,' '8.24 per cent GS 2027' and '7.40 per cent GS 2035' for the notified amounts of Rs 8,000 crore (Rs 80 billion), Rs 3,000 crore (Rs 30 billion), Rs 2,000 crore (Rs 20 billion) and Rs 2,000 crore (Rs 20 billion) respectively.

Their cut-off yields for these securities offered were 6.7346 per cent, 7.4605 per cent, 7.7698 per cent and 7.8303 per cent.

RBI conducted the auction based OMO purchase of dated government securities on June 18, 2009, for the notified amount of Rs 6,000 crore (Rs 60 billion). It accepted the bids for only Rs 4,620 crore (Rs 46.2 billion) worth of securities.

The securities purchased included '7.38 per cent GS 2015,' '8.35 per cent GS 2022' and '8.33per cent GS 2036,' while the cut-off yield for these securities were offered at 6.6711 per cent, 7.4485 per cent and 7.8503 per cent respectively.

The RBI conducted the auction of four dated securities for the notified amount of Rs 15,000 crore (Rs 150 billion) on June 19, 2009. The cut-off yields were offered for these securities at 7.35 per cent for '15 Year GS 2024' (Rs 3,000 crore/Rs 30 billion), 6.6498 per cent for '6.49 per cent GS 2015' (Rs 5,000 crore/Rs 50 billion), 6.8749 per cent for '6.35per cent GS 2020' (Rs 5,000 crore/Rs 50 billion), and 7.8021 per cent for '7.50 per cent GS 2035' (Rs 2,000 crore/Rs 20 billion) respectively.

The government of India has announced the sale of dated securities worth Rs 15,000 crore (Rs 150 billion) on June 26, 2009.

As per the Scheduled Banks statement of position in India, banks investment into government and other approved securities increased by Rs 16,630 crore (Rs 166.3 billion) in the fortnight ended June 5, 2009. Thus, the total investment to deposits ratio improved to 32.1 per cent from 31.7 per cent at the end of previous fortnight.

Rupee weakens to one month low level on rising crude oil prices and losses in local stocks

The partially convertible Indian rupee weakened 2.1 per cent to 48.1 a dollar during the fortnight ended June 19. The crude oil prices rising to its eight months highest level have raised the worries for dollar demand for oil import, which accounts for 30 per cent of the India's import bill, thus have impacted the value of rupee.

However, FIIs withdrew funds worth Rs 1,667.6 crore (Rs 16.68 billion) from domestic equities, which pushed the rupee to one month's low level.

The rupee tumbled 1 per cent to end at 47.55 a dollar on June 8, as the equity index plunged 2.9 per cent, recording the biggest fall in six weeks, which raised concerns over whether the strong capital inflows of recent months would continue.

The rupee improved 0.2 per cent on June 9 and further jumped 0.5 per cent to 47.24 a dollar on June 10, as rising share prices reinforced expectations of higher capital inflows. The main share index surged to its highest close in 10 months.

However, the crude oil prices surged above $70 a barrel mark, while the local shares also extended losses. Thus the rupee weakened to 47.61 a dollar on June 12 and further tumbled to a three week low level of 47.75 a dollar on June 15, 2009.

The rupee further weakened 0.23 per cent to Rs 47.86 a dollar on June 16, due to a demand for the dollar from refiners speculating a rise in crude oil prices. It touched fresh one-month lows at 48.22 per dollar on June18, recording a fall for the sixth sequential session, as the stock market fell for the fifth time in six sessions, with gains in the dollar versus the euro also adding to the downward pressure.

However, the rupee improved 0.25 per cent to close at 48.10 a dollar on June 19, tracking gains in local and other Asian stocks.

 

Crude oil prices rises above $70 a barrel mark

The International Energy Agency forecasted that the slump in global oil demand in 2009 would be slightly less severe than previously expected. The IEA said, revising its forecast upward for first time in 10 months, that global oil demand would fall by 2.9 per cent to 83.3 million barrels a day in 2009, compared to earlier projections of 3 per cent annual fall in demand, the sharpest rate of decline since 1981.

Crude oil futures have surged 4.89 per cent in June 2009 so far, in addition to record increase of 29.7 per cent posted in May 2009. Currently, the crude oil prices have been ruling around the OPEC's target price of $70 a barrel. In CY 2009, the crude oil prices have gained 55.9 per cent.

Crude oil surged from $68.09 on June 8 to close above $70 a barrel mark on June 9 after more than seven months, as sentiments were lifted due to weaker dollar and forecasts of higher fuel prices by US energy department.

It further touched $71.33 a barrel on June 10 and further jumped to $72.68 a barrel on June 11, after the energy department reported a surprising drop in crude oil inventories due to a fall in imports and a pick up in gasoline.

As per the data, crude inventories for the week ended June 5 plunged 4.4 million barrels to 361.6 million barrels. The IEA raising the oil demand outlook also bolstered the crude oil prices.

The strong dollar and OPEC scaling up output for the second month weighed on crude oil prices, which ended lower at $72.04 a dollar on June 12 and plunged to $70.62 a barrel on June 15, 2009.

Crude oil futures fell by 0.2 per cent to close at $70.47 per barrel on June 16. Prices initially went up during the day boosted by couple of encouraging economic reports. But it failed to stick to its gains and ended ultimately lower as traders continued to anticipate that recent rally in crude is overdone.

However, an encouraging batch of economic reports hinting at a possible recovery of the US economy in the near term raised the possibility of higher demand of crude in coming months.

Crude price touched $71.03 per barrel on June 17 and ended high at $71.37 per barrel on June 18. However, concerns over oil demand weighed on sentiments, pushing the prices below the $70 mark on June 19.

Crude oil prices declined 3.5 per cent to $69.55 a barrel during the week, recording a fall after the increase over last four sequential weeks.

Inflation fells negative at -1.61 per cent

The annual rate of inflation, calculated on point to point basis, stood at -1.61 per cent for the week ended June 6, 2009, as compared to 0.13 per cent for the previous week and 11.66 per cent during the corresponding week of the previous year.

Inflation has dipped to negative for the first time since 1976-77, thanks to the higher base effect. The WPI based inflation recorded a fall of 1.1per cent in 1975-76.

Money market

Call rate remains depressed with ample liquidity in the banking system.

The overnight call money rates moved in the narrow range of 3.07-3.26 per cent during the period under review. Although the mean of call rate rose to 3.21 per cent from 3.19 per cent in the previous fortnight, the standard deviation, the measure of volatility, was mere 6 bps compared to 10 bps in the previous period.

The call rates have also been moving below the reverse repo rate of 3.25 per cent from nearly two months since April 22, with ample liquidity in the system and a lack of demand for cash.

The banking system continued to be awash with surplus liquidity, with sustained a inflow of deposits and stressed credit growth. The hefty cut in reserve requirement by the RBI has also left huge cash with the banking system.

However, the bank credit and investments of the SCBs in India increased by Rs 21,460 crore (Rs 214.6 billion) and Rs 16,630 crore (Rs 166.3 billion) respectively in the fortnight ended June 5, while the deposits increased by marginal Rs 3,656 crore (Rs 36.56 billion), which has negative impact on liquidity of the banking system.

The RBI absorbed Rs 123,078 crore (Rs 1230.78 billion) worth of surplus liquidity in the banking system on daily average basis during the fortnight under review.

The government has discharged bonds worth Rs 66,089 crore (Rs 660.89 billion) in the current fiscal up to June 15, 2009, thus adding to the liquidity. On negative note, none of the bonds are due to mature in rest of the calendar year 2009, so no more redemption inflows can be expected up to January 2010.

The government of India discharged 5.48 per cent bond 2009, which infused Rs 22,000 crore (Rs 220 billion) worth of liquidity into the system and forced the call rates that was ruling around 3.23 per cent on June 8 to plunge to a two weeks low level of 3.15 per cent on June 12.

The call rates further eased to 3.07 per cent on June 13, 2009. However, the call rate moved above to repo rate for the first time after eight weeks due to advance tax outflows and heavy supplies of securities. But the excess liquidity in the system and RBI infusing Rs 4,620 crore (Rs 46.2 billion) through purchase of securities under OMO helped call rates to ease back to the sub repo rate level.

The CBLO and market repo rate improves

The mean of the weighed average rate in the CBLO and increased to 2.47 per cent during the fortnight from 2.34 per cent in the previous fortnight, while the WAR in market repo declined to 2.31 per cent compared to 2.55 per cent, in previous fortnight, which narrowed the spread between call rate and CBLO rates.

The lower rates in CBLO attracted the banks short of cash, which pushed the CBLO rate during the fortnight.

The daily average volume in the CBLO witnessed a sharp increase to Rs 52,140 crore (Rs 521.4 billion) from Rs 42,902 crore (Rs 429.02 billion) in the previous fortnight. However, the average volume in market repo also stood increased to Rs 18,584 crore (Rs 185.84 billion) compared to Rs 17,566 crore (Rs 175.66 billion) during previous fortnight.

Among the three short-term money market segments, the CBLO accounted for 64.9 per cent of the market share, while repo and call accounted for 23.1 per cent and 11.9 per cent, respectively, during the fortnight.

Repo window utilised first time during FY09

All scheduled commercial banks in India parked excess cash balance worth Rs 123,078 crore (Rs 1230.78 billion) on a daily average basis through the reverse repo auction during the period under review, compared to Rs 125,481 crore (Rs 1254.81 billion) in the previous period.

However, for the first time since March 30, 2009, the RBI infused Rs 500 crore (Rs 5 billion) into the system against one bid received at repo window on June 19, 2009.

Treasury bill yields ease marginally

The cut-off yield offered for the 91 days T-bill stood at the same level of 3.357 per cent for the third sequential week in the auction held on June 17, while the cut-off yield for 18 days T-bills has also remained unchanged at 3.5929 per cent for the second week in the auction held on June 10.

However, the cut-off yield for 364 days T-bill declined marginally to 3.9935 per cent on June 17 from 4.0043 per cent in the auction held on June 3, 2009.

OMO purchases and MSS balance

The RBI conducted the purchase government securities under the open market operation aggregating Rs 4,620 crore (Rs 46.2 billion) against the notified amount of Rs 6,000 crore (Rs 60 billion) on June 18, 2009. The cut-off yields were placed in the higher range of 6.67 - 7.85 per cent compared to 6.92 - 7.65 per cent in the previous purchase of securities on June 4.

The RBI has purchased securities worth Rs 28,188.6 crore (Rs 281.89 billion) so far in current fiscal, under OMO, against the notified amount of Rs 36,000 crore (Rs 360 billion) in six issues of Rs 6,000 crore (Rs 60 billion) each.

The RBI has planned OMO purchase of government securities of the order of Rs 80,000 crore (Rs 800 billion) in the first half of 2009-10, including Rs 40,000 crore (Rs 400 billion) envisaged for the first quarter of 2009-10.

The market stabilisation scheme account balance remained declined by Rs 17,000 crore (Rs 170 billion) to Rs 22,890 crore (Rs 228.9 billion) as on June 12, 2009, while it shows a sharp fall from Rs 174,433 crore (Rs 1,744.33 billion) a year ago.

Treasury bill and commercial paper benchmark increases marginally

Treasury bill benchmarks of various maturities have recorded marginal increase in proportionate manner during the fortnight under review.

The T-bills benchmark of long maturities from 270-364 day has increased by 3-4 bps, while the benchmark for medium maturities from 90-240 days increased by maximum 5 bps, while the T-bill benchmarks with 7-60 days increased in the range of 1-4 bps.

However, the 90 day T-bill benchmark declined 1 bps in the fortnight, while 180 days and 364 days T-bill benchmark rose 05 bps and 3 bps during the fortnight under review.

The commercial paper benchmark of the 6-12 months has recorded increase during the fortnight under review.

The 1-5 month's CP benchmark declined by maximum 4 bps, while the 6-10 month's CP increased by 2 bps.

The 6 month and 1 year CP benchmark increased by 1 bp to 6.26 per cent and 3 bps to 7.19 per cent, compared to marginally 20 bps and 16 bps increase recorded in the previous fortnight.

Outlook

The banking system continues to be awash with surplus liquidity, with the rising inflow of deposits and stressed growth of bank credit. The banks have been parking excess cash with central banks under LAF and in government securities and the call money rates have been moving below the reverse repo rate.

However, the access to CBLO market, where entities like insurance companies and mutual funds, etc, lend at lower rates, have further eased pressure on call rates. It is expected that the call rate would continue to rule at lower level until banks speed up the lending to corporate sector.

The government of India has continued to increase the issuance size of securities more than the planned level for sequential sixth week, while there is uncertainty about the exact borrowing for the current fiscal.

Although the government is mooting divestment of stale in PSUs, which can reduce its dependence on market borrowing to meet fiscal gap, only the Budget can impart clarity on the issue.

So, the investors are awaiting the revised borrowing plan to be announced at the full Budget for 2009-10 on July 6, 2009. Until then the yields would continue to trade range-bound.

The ample liquidity in the system and inflation expectations would also guide movements in bond yields in the near term.

Yield on government securities

Date

6.05 per cent GS 2019

6.07 per cent GS 2014

June 8, 2009

6.58

6.37

June 9, 2009

6.65

6.36

June 10, 2009

6.79

6.48

June 11, 2009

6.89

6.63

June 12, 2009

6.89

6.66

June 15, 2009

-

6.63

June 16, 2009

6.88

6.67

June 17, 2009

6.89

6.61

June 18, 2009

6.91

6.59

June 19, 2009

6.93

6.64

 

Money Market Rates

Date

Weighted average rate

Volume (Rs Crore)

Call money

CBLO

Market repo

Notice money

Call money

CBLO

Market repo

Notice money

June 8, 2009

3.23

2.76

2.81

0.00

10709

62233

25751

0

June 9, 2009

3.24

2.79

2.88

2.25

12117

69708

24747

1

June 10, 2009

3.24

2.91

3.00

0.00

11189

68608

22312

0

June 11, 2009

3.24

2.90

3.04

0.00

11759

63660

22823

0

June 12, 2009

3.15

2.02

2.88

3.23

88

2154

1436

10124

June 13, 2009

3.07

1.15

0.50

0.00

528

2761

11

0

June 15, 2009

3.24

2.70

2.75

2.60

14764

77966

25271

10

June 16, 2009

3.26

2.64

2.82

3.32

15294

73936

27598

139

17-Jun-09

3.23

2.31

2.67

1.04

13555

74899

26057

16

June 18, 2009

3.24

1.98

2.08

0.00

15004

71550

28426

0

 

Details of Daily Trades in Corporate Bonds

 

BSE

NSE

FIMMDA #

Grand Total

Date

No of Trades*

Amount (Rs cr)*

No of trades*

Amount (Rs cr)*

No of trades*

Amount (Rs cr)*

No of trades*

Amount (Rs cr)*

June 8, 2009

2309

71.04

29

307.50

32

202.50

2370

581.04

June 9, 2009

1850

63.05

36

349.50

35

148.93

1921

561.48

June 10, 2009

1818

131.54

40

445.30

38

185.97

1896

762.81

June 11, 2009

1274

53.06

40

413.50

45

330.48

1359

797.04

June 12, 2009

2096

47.17

21

208.90

37

111.29

2154

367.36

June 15, 2009

1542

870.47

23

738.21

40

575.41

1605

2184.09

June 16, 2009

2341

183.60

39

468.08

63

1390.29

2443

2041.97

June 17, 2009

1600

147.72

38

398.36

61

561.78

1699

1107.86

June 18, 2009

2037

160.96

38

556.00

68

369.79

2143

1086.75

* Comprises OTC trades and trades done on the exchange

# In the case of FIMMDA, figures comprise only OTC trades reported (FIMMDA reporting platform became operational with effect from September 2007)

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