View on RBI’s Borrowing Calendar
March 27, 2009
The factors, governing the interest rate market continue to remain mixed. In a normal environment, the steps like rate cut, benign inflationary environment, intervention of RBI in the money market via OMO purchase of Government securities, significant slow down in the credit off take, slowing down in the industrial activity as depicted by the IIP numbers and moderation in growth would have surely given a sentimental and fundamental boost to the bond curve. However, the fear of enormous supply in the following quarter led the market participants to restrict their position build-up. The results were too obvious then; there was a significant hardening and steepening in the yield curve and the outlook from the market perspective remain cautious and uncertain. The 10yr closed at 7.03%, which is significantly higher than the previous month close at around 6.05%.
The RBI announced the much-awaited borrowing calendar for the first half of the next fiscal year. The total borrowing for the first six month of the calendar is pegged at INR 2.41 trln (two-third of the budgeted gross borrowings in FY10). The first quarter borrowing is stated around INR 480 bln per month and the second quarter of the fiscal is likely to see a borrowing of INR 320 bln every month. This will lead to around INR 120 bln of supply every week in the initial part of the year. On a standalone basis, this looks to be very steep and almost impossible for the market to digest. The first cut reaction will be that we've miles to go before the general interest rate settle down but…
RBI emphasizes the need to conduct the borrowing in a manner that is least disruptive for the interest rate market. It unleashed some of those measures left at its disposal in order to meet the objective. Along with the borrowing calendar, RBI simultaneously announced the OMO calendar, proposing to buy back government securities of INR 800 bln in the first half of 2009-10. Of this, purchase of government securities of INR 400 bln is envisaged for the first quarter itself. The RBI also proposes to do unwinding of MSS securities worth INR 420 bln for the first half of the calendar. Furthermore, it is to be noted that the Government of India securities amounting to around INR 330 bln are due for redemption in the first half of the fiscal. We also have estimated coupon payments in the first half of the year aggregate to around INR 670 bln.
The total inflow because of all these measures and flow works out at around INR 2.2 trln against the gross borrowing of around INR 2.41 trln. The holistic analysis of the situation leads us to believe that the situation is not as grim as thought earlier. If credit growth indeed slows down further, we may see a renewed interest in the Government bonds especially from the banking sector. The RBI can also buy government bonds from the secondary market if the situation demands so. They still have other tools like Private placement of government debt and Monetization that may be put to use after election if
the situation gets to a stage where it may look like going out of hand.
The market may trade a shade lower for the next few days in a knee jerk reaction to the borrowing calendar. However, the support from RBI will ensure that the rise in yield is capped. The yield curve may actually settle down lower over a period as and when supply sinks in. The upside on 10yr looks to be around 7.25%-7.50%, but on the downside, we may see sub 6% level in some time. In our view, the risk-return matrix is favourably tilted more towards long duration.
Thanks,
Rohit Gadia
BigGains !!
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