Market Analysis

    ・Launch of MSBs deferred till next fiscal. Central Bank Governor says it will be a smooth affair.
    ・The US FOMC maintains its funds rate at 1%. Believes it can be patient in removing its policy accomodation.
    ・Foreign money continues to pour in as forex reserves reach $109.59 bn for week ended March 12, 2004.
    ・Rupee ends the fortnight at 45.16/$ as against 45.29/$ as at the end of the previous fotnight.
    ・Inflation rate for week ended March 06, 2004 falls sharply to 4.91% as against 5.32% for the previous week.

Abundance of liquidity and cautious approach at the year-end kept a steady demand for short term paper leading to a substantial fall in the TBill yields. The cut - off yield of 364 DTB fell by as much as 11 bps while 91 DTB saw a drop of 4 bps.

With the MSBs being postponed to the next fiscal and continued surpluses in the system the Tbill rates are expected to remain low both in the primary and secondary markets.

The last fortnight had no issuance of Government paper either in GSec or in SDL.

The advance tax outflow in mid-March went through quite smoothly in the backdrop of ample liquidity in the system. The credit growth has been heartening and the figure for non-food credit growth as on February 20, 2004 (fortnightly) at Rs. 10500 crore was the highest in a long time. This was mainly on the back of demand from retail sector as well as corporate and infrastructure spending. At the same time deposit growth too has been robust causing the liquidity surplus to continue to grow.

The last fortnight saw a slew of IPOs hitting the capital market. The largest of them, ONGC, saw considerable foreign interest. Huge forex inflow for subscription of all these issues led to further RBI intervention in the forex market leading to increased rupee liquidity.

In the first week of the fortnight the market was betting on the MSS bonds to be issued soon, probably prior the redemption of 12.50% GS 2004 on March 23, 2004. But on March 12, the market got a double boost, as MSS was deferred to next fiscal and inflation showed a sharp drop to 5.32% from 5.91% as at the end of the previous week. This led to a smart rally in gilts as 10-year yield dropped to 5.18% from 5.21%. The medium term bonds picked up by 30-40 paise while long bonds gained 50-60 paise. The gains were accompanied by good volumes and NSE turnover crossed Rs. 6000 crore.

The rally in bonds continued in the second week too disregarding the rise in oil prices in international markets. The fact that there may not be any corresponding oil price hike in domestic market till elections are through, appears to have been factored in by the market players.

The US FOMC kept its target rate at 1.0% on Wednesday March 17, 2004 leading to a smart rally in US bonds. This had a corresponding effect on our debt market as gilts rose here too. At the end of the week, when inflation figures were released the prices of bonds rose further. Inflation rate at 4.91% was lower than market expectations and was seen below the 5.0% mark for the first time in 16 weeks.

PDAI and FIMMDA had their annual conference in Dubai over the weekend just gone by. RBI Deputy Governor also attended the conference. The salient features of his speech included:

    ・RTGS to be implemented soon
    ・Market should prepare for fall in Government borrowing
    ・Issuance of corporate debt to go up
    ・Demand in Long Term papers to go up
    ・RBI mulling exclusive access to Primary Dealers at gilt auctions.

The last fortnight saw maximum activity in the 2017 bonds. The top three bonds in this segment accounted for 51% of the turnover of the top ten bonds and 27% of NSE turnover. NSE turnover itself showed an increase of 39% over the previous fortnight to cross Rs. 50000 crore.

The subscription to RBI's overnight Repo crossed Rs. 50000 crore for the first time ever on March 09, 2004. The figure touched a peak of Rs. 55045 crore on March 16, 2004. This abundance of money in addition to the 14 day figure of over 7000 crore is a cause for concern for the Central Bank but a comfort to all the market players.

Call money rates hovered in the range of 4.25% - 4.50% throughout the previous fortnight while the market Repo rates were lower at sub 4.00% levels.

The coming fortnight shall continue with the low rates in Call as well as Repo market albeit with some volatility at the year end.

Secondary Market Yield Curve

The yield curve saw a parallel downward shift in the last fortnight except for at the very near end which was steady.