Debt Market Weekly Report May 15, 2012 Money Markets: The week ending on 11th May 12, witnessed a further deterioration in systemic liquidity. RBI on an average infused net Rs.118,028 cr daily into the system via the LAF Repo window as compared to average of Rs.100,041 cr for previous week.. Money market rates inched higher as the liquidity situation deteriorated. Call rates ended at 8.30% as compared to 8.25% in the previous week. The CBLO rates ended at 8.00%, as compared to the previous week’s 7.46%. The money markets are expecting some respite form the RBI in the form of CRR cut. There is a room for another atleast 75 bps of CRR cut for the RBI. G-Sec Market: RBI conducted auction for the securities 8.24% GS 2018, 8.79% GS 2021, 8.28% GS 2027 and a 8.83% GS 2036 for a total notified amount of Rs.15,000 cr The cut-offs for securities came in at 8.56%, 8.57%, 8.87% and 8.95% respectively. All the four securities were fully subscribed. The bid-cover ratio was at 2.46 as compared to 1.87 in the previous auction. The benchmark 10-yr security 8.79% GS 2021 closed at 8.56% a fall of 6 bps w-o-w. The G-sec market witnessed some easing in the yields helped by the OMO during the week and also on account of falling global crude oil prices. The g-sec market also drew comfort from the RBI deputy Subir Gokarn’s comment stating that the liquidity continues to be outside RBI’s comfort zone, speculating further announcement of OMO auctions. The IIP numbers too witnessed some buying in the g-sec market. The market is awaiting the announcement of new 10-yr benchmark security; the cut-off is expected to be around 8.40% levels. RBI conducted OMO purchases during the week. Out of a total notified amount of Rs.12,000 cr, RBI received offers for Rs.19,160 cr of which RBI accepted offers of Rs.9,757 cr. The OIS curve reflected the sentiment in the underlying g-sec which saw some easing in the yields. The 5-yr OIS closed at 7.53%, 8 bps lower from the previous week levels; while the 1-yr OIS closed at 8.05%; 2 bps lower from the previous week levels. The 1 –5 yr spread narrowed on a weekly basis by 6 bps to end at -52 bps levels. The OIS would continue to see paying pressure on the shorter-end of the curve as liquidity problems persist. Corporate Bonds The activity in the corporate bond market mirrored that of the underlying g-sec with some value buying in the longer tenor papers. The 10-yr AAA bond traded at a yield of around 9.38%, 3 bps lower from its previous week closing levels of 9.41%. The yield on 1-yr AAA bond ended at 9.75%, 15 bps higher from its previous week closing levels of 9.60%. The primary market did not witness any major issuance by the corporates. Macro Indicators. In order to halt the rupee slide, RBI has mandated all the companies to hold only 50% of their exports proceeds into the EEFC A/c (Exchange Earner’s Foreign Currency A/c). RBI has capped the Intraday Open Position Limit (IOPL) of the AD banks to 5 times of their Net Overnight Open Position Limit (NOOPL). The IIP (Index of Industrial Productivity) for Mar 2012 contracted by 3.50% as against a growth of 4.10% in Feb 2012 and a growth of 9.40% in Mar 2011. The manufacturing, mining, capital & consumer goods output grew by -4.4%, -1.3%, -21.3% & 0.7% respectively. RBI has allowed FIIs to invest in commodity exchanges without obtaining the permission of Government. However the limit of foreign investment in commodity exchanges has been kept unchanged. The Finance Ministry has deferred the implementation of GAAR (General Anti-Avoidance Rules) by another year. RBI has allowed utilization of FCNR (B) funds representing deposit liabilities towards forex or rupee working capital requirement of exporters. The monthly WPI inflation rose to 7.23% in April 2012, from 6.89% in March 2012. Rupee depreciated to near-54 levels, impacted by instability in Euro markets and domestic uncertainties. Moodys downgraded financial strength ratings of 3 private sector banks, from C- to D+; however there is no change in credit rating. Moodys also brought down credit rating of LIC from Baa2 to Baa3. Global Markets The US initial jobless claims fell by 1000 to 367,000. The trade deficit for Mar 12 widened to $51.8 bn as against $45.4 bn in the previous month. The Greece parliament deadlock continues as no party was able to reach an agreement in order to form a coalition Government. As such Greece is expected to go for re-elections in the next month. The markets are already speculating a possible exit of Greece from the Euro zone. People’s Bank of China cut the lenders reserve ratio requirement by 50 bps to 20% JP Morgan has reported a huge loss of $2 bn in its synthetic credits trading portfolio. The Bank of England kept the benchmark commercial reserves rate unchanged at 0.50% and maintained the asset purchase program at GBP325 bn. 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