Indian Fixed Income

Bond yields fell during the month amid high trading volumes before moving up in the last week. Weak Gross Domestic Product (GDP) numbers faded hopes of a rate cut in the upcoming monetary policy review by the Central Bank. Lower-than-anticipated headline inflation numbers and Central Bank Governor D Subbarao’s comments that he had taken note of falling inflation hinted at a potential shift in the Central Bank's hawkish stance. This supported bond yields earlier during the month. Moreover, foreign investors’ interest in debt also supported bonds as they continued to snap up Indian debt as part of a rally in riskier assets globally. The old 10-year benchmark 8.15% GS 2022 ended the month at 7.44%, which is 29 bps lower than the last month’s closing of 7.73%. The new 10-year benchmark (7.16% GS 2023) ended the month at YTM of 7.24%. 

 The Central Bank lowered the repo rate by 25 bps for the third time this calendar year, bringing it down to 7.25%, as inflation moved below 6% (for March 2013) and trade deficit also moderated in the January-February 2013 period. The Central Bank, however, is concerned over high Current Account Deficit (CAD), though it expected CAD for FY14 to be lower than FY13. While the Central Bank noted that space for further monetary easing was “very limited”, it said that if inflation eases further and the upside risk became more benign, space for monetary easing will open up. Moreover, the Central Bank lowered the amount of bonds that banks can hold till maturity (HTM) as part of their Government bond holding by 200 basis points (bps) to 23%. GDP data for 4QFY13 came in line with market expectations and the Central Bank Governor’s recent comment on high retail inflation and his view that lower international commodity prices will not be sustained in the long run dented hopes of rate cut in the upcoming monetary policy, scheduled on June 17.

 Interbank call money rates moved in the range of 7.17% to 7.55%, during the month. The 3-Month CD (Certificate of Deposit) traded in the range of 7.95% to 8.20% while 3-Month CP (Commercial Papers) traded in the range of 8.33% to 8.56%. Banks’ net average borrowings from the Central Bank’s Liquidity Adjustment Facility (LAF) stood higher at Rs. 97,280.00 crore, higher compared to the previous month’s figure of Rs. 83,086.39 crore. The Central Bank conducted the open market operation of Rs. 10,000 crore on May 7 to curb the liquidity deficit. Moreover, Central Bank’s Deputy Governor HR Khan said that the Central Bank will address the tight liquidity situation and is likely to take steps to curb the deficit. The Central Bank said that it will manage liquidity to reinforce monetary policy transmission.

· Yields on the Government Securities fell across the papers in the range of 11 bps to 49 bps. The decline in the medium and long-term securities was higher compared to short-term papers. Yields declined most on 11-year paper during the month. In line with Gilt securities, corporate bond yields were also lower on the entire segment by up to 38 bps. It dropped in the range of 6 to 38 bps with the highest change in 6 to 8-year papers. The spread between AAA Corporate bond and Government securities contracted up to 20 bps across the segment, barring 1 and 15-year papers where spreads expanded.

 The Central Bank conducted the auction of Government papers worth Rs. 75,000 crore during the month of May compared to Rs. 45,000 crore recorded in April. The new 10-year benchmark paper (7.16% GS 2023) was also introduced in this month and was auctioned at a yield of 7.16%. In addition, the Central Bank also auctioned Treasury Bills worth Rs. 42,000 crore and State Developmental Loans (SDL) worth Rs. 10,580 crore during the month.

 The Wholesale Price Index-based (WPI) inflation data stood at its lowest level in the last 41 months. It stood at 4.89% for the month of April against the last month’s reported figure of 5.96% (provisional) and the same period last year’s figure of 7.50%. The food index for both Consumer Price Index (CPI) and WPI moved fell to 10.61% and 6.08% against 12.42% and 8.73% recorded a month ago.

 The industrial output for March remained in the positive territory and stood at 2.51% on a Y-o-Y basis against the same period last year’s figure of (-) 2.80%. The cumulative growth for the period of April-March 2012-13 stood at 1.0% against 2.90% recorded in the corresponding period last year.

 The Central Bank also announced its first auction of Inflation- Indexed Bonds (IIBs), to be conducted on June 4. The bonds are being issued with an aim to protect savings of poor and middle classes from inflation and incentivize household sector to save in financial instruments rather than buying gold.

 The Government said that it would impose a 5% tax on interest payment for Foreign Institutional Investors and Qualified Foreign Investors for investment in Government and rupee-denominated corporate debt from June 1, 2013 to May 31, 2015 against the current level of 20%.