Debt Market Weekly Report May 20, 2013 Money Markets: The week ending on 17th May 13, witnessed marginal deterioration in the liquidity with average daily net borrowing under LAF at Rs.103,443 cr as compared to Rs.102,042 cr for previous week.  Money market rates remained elevated as liquidity deficit worsened; call rates ended at 7.28% as against 7.33% in the previous week. The CBLO rates ended at 6.50%, as against previous week’s 7.24%. G-Sec Market: RBI conducted auction for the securities 7.83% GS 2018, 8.97% GS 2030, 8.83% GS 2041 and New 10-yr security for a total notified amount of Rs.15,000 cr The cut-offs for the securities came in at 7.22%, 7.38%, 7.41% and 7.16% respectively. All the four securities were fully subscribed. The bid-cover ratio was at 3.71 as against 3.94 in the previous auction.  The benchmark 10-yr security 8.15% GS 2022 closed at 7.40% 19 bps lower w-o-w. The g-sec market staged a strong rally during the week as the WPI & CPI inflation as well as core inflation release was far lower than the market expectations. Favourable comments from Governor Subbarao on monetary easing gave a further boost to the g-sec, markets as the 10-yr yields dropped to a low of 7.35% on Wednesday. However profit booking at those levels witnessed some hardening in the yields. The New 10-yr security witnessed huge bidding interest. RBI auctioned Rs.7,000 cr worth of the new security. The new 10-yr 7.16% GS 2023 also witnessed a strong demand in the secondary market post issuance as it traded at intraday low yields of 7.09%.  RBI has allowed excess SLR holding in the HTM (Held-to-Maturity) category. But it has provided for a cut in the HTM limit by 50 bps every qtr taking it to 23% by Mar 2014, inline with the current SLR rate of 23%. The OIS curve witnessed receiving as it ended lower WoW. The 5-yr OIS closed at 6.77%, 14 bps lower from the previous week levels; while the 1-yr OIS closed at 7.10%; 10 bps lower from the previous week levels. The 1 – 5 yr spread narrowed on a weekly basis by 4 bps to end at -33 bps levels. The OIS curve is likely to witness further receiving as the underlying g-sec market continues to rally on the back of dovish sentiments. Corporate Bonds The corporate bond market too witnessed a strong rally as the traders bought heavily in the papers across tenors. The 10-yr AAA bond traded at a yield of 7.95%, 35 bps lower from its previous week closing levels of 8.30%. The yield on 1-yr AAA bond ended at 8.00%, 25 bps lower from its previous week closing levels of 8.25%. Major corporate bond issuances during the week were: PGC issued 7.93% 15-yr amortized bonds to raise Rs.3,126 cr. HDFC issued 8.50% 5-yr bonds to raise Rs.500 cr. Exim Bank issued 7.87% 3-yr bonds to raise Rs.200 cr. RBI will issue the 1st tranche of inflation bonds on 4th June for Rs.1,000-2,000 cr. Total issuance would be around Rs.12,000-15,000 cr. The coupon will be fixed and the principal would be linked to WPI. The maturity would be 10 years. The 1st series will be open for all investors, while the second one in October would be solely for retail investors. All the subsequent issues would be on the last Tuesday of every month. L&T plans to raise Rs.100 cr via issuance of inflation bonds paying a coupon of 1.65% over 12 month average WPI. L&T will become the first company in the country to launch inflation linked bonds. NSE’s debt segment witnessed 52 trades done by retail investors on the first day. SEBI is to issue the guidelines for FII trading in the debt, by next month. Macro Indicators.  India’s Exports registered growth of 16.6% to $24.16 bn in Apr 13, whereas the imports grew by 10.90% to $41.95 bn. The trade deficit rose to $17.8 bn in Apr 13 from $14 bn in Mar 13. RBI has restricted gold imports by nominated banks, permitting only on consignment basis. And disallowing imports on loan basisi, Buyers’s & Suppliers’s credit basis and also on unfixed price basis. Panel comprising of RBI and Government has allowed Oil Marketing companies to finance short-term credit through ECBs. The overall limit has been kept unchanged. The panel has also extended ECB relaxation for affordable housing for 2 yrs and aviation for few more months. Ratings agency S&P has maintained India’s rating at ‘BBB-’ with negative outlook. S&P stated that despite the recent improvement on the fiscal and policy front the chances downgrade remain at 1 out of 3. Monthly WPI inflation stood at 4.89% in April 2013, as against 5.96% for March 2013. Global Markets US retail sales rose unexpectedly by 0.10% in Apr 13 after a revised 0.50% decline in Mar 13. US Michigan Confidence Index rose to its highest levels in six years at 83.7 in May 13 from 76.4 in Apr 13. Fed’s San Francisco President John Williams stated that the Fed may begin tapering the bond buying program as early as this summer.  Fed Chairman Ben Bernanke is to testify in front of the Congress in the coming week on the country’s economic outlook. The Euro area GDP contracted by 0.20% worse than market forecasts of 0.10% contraction as the recession extended to a record 6th qtr in the Euro area. German GDP grew by 0.10% lower than market forecasts of 0.30% expansion.  The German investor sentiment given by ZEW rose lower than expected to 36.4 points from the 36.3 in Apr 13. ECB chief Draghi mentioned that buying ABS (Asset backed Securities) could be an option for the ECB. Draghi expects Euro area GDP to shrink 0.50% in 2013 & subsequently expand by 0.50% in 2014. 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