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High inflation was despite 125 basis points hike, since the beginning of this financial year. The ten-year yield (return an investor earned if a bond was held till maturity) as a result firmed to 8.34 per cent last weekend translating into a price of Rs 96.49. The previous week the benchmark ten year security (7.80 per cent coupon falling due 2021) yield was 7.29 per cent. The trigger for hardening yield was clearly the GDP numbers released last week that saw growth decelerating to 7.7 per cent. At the same time, GDP deflator, a key measure of long-term inflation was 9.74 per cent. This implied that inflationary expectations were far from being reigned in. Food inflation for latest week is 10.05 per cent.
Prime Minister’s Economic Advisory Council chairman C Rangarajan said, “As long as inflationary expectations remain high, interventions (RBI policy rate hikes) will continue.” Numbers and statements kept markets on the edge.
Trade volumes, barring the per cent.
Prime Minister's Economic Adviso ry Council chairman C Rangarajan said, “As long as inflationary expectations remain high, interventions (RBI policy rate hikes) will continue.“
Numbers and statements kept markets on the edge.
Trade volumes, barring the 7.80 per cent security contracted, as sellers overshadowed buyers. Bond market trade volumes last weekend dipped below Rs 10,000 crore a day down from last week's Rs 14,600 crore.
Traders said selling pressure was also on account of mounting liquidity pressures in the markets.
A trader said on the condition of anonymity, “RBI wants to keep markets in a deficit mode. That left only one way for yields to move, up.
The liquidity deficit manifested in high borrowings from the RBI's repurchase (borrowings against a collateral of government securities) window. Recourse to the Repo window last weekend was Rs 39,055 crore.
However banks also stepped up resource mobilisation from the highly volatile certificate of deposits (CD) markets. Resources raised through CDs last till last month beginning this financial year was over Rs 1.75 lakh crore or double figure for the corresponding period of last year. Besides, average cost of raising funds at 9.26 per cent, were at least 250 basis points more.
The liquidity deficit conditions in the market saw first devolvement of government borrowings on the underwriters this fiscal year. At Friday's government borrowings auctions for Rs 11,000 crore, the 7.99 per cent coupon security falling due 2017 had to be supported by underwriters to the extent of Rs 725.25 crore.
Traders who had bid at the auctions said, the underwriting support was largely on account of low prices quoted by some large bidders. Traders said that some bids were at least 6 basis points above the cut off price of 8.39 per cent on the security. The cut off price or the reserve price is decided on the basis of the bids made including underwriting support. This is usually done on the basis of the lowest price (or highest yield) quoted at the auction. With some bids at 8.45 per cent, the bids were rejected, traders said.
It was the longer-term securities, 8.13 per cent security falling due 2022 and the 8.30 per cent 2040 that elicited buying interest. Bids on these securities were within the cut-off yields at 8.46 per cent and 8.66 per cent. Bids on these securities exceeded offered amounts by at least 2.15 times. Traders said that this was because there was little interest in short term securities at low yields. Short term securities, are normally favoured by banks, when liquidity is tight. This time though banks have turned to longer term securities, in view of low credit demand with rising interest rates raising fears of asset stress.
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