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All eyes on US Fed meet this week: Jajoo

Back home, with banks and mutual funds focused on fiscal year end, money markets will steal all the attention

Mahendra Jajoo
Last Updated : Mar 18 2014 | 10:53 AM IST
The debt market sentiment stabilised further last week guided by improved economic data, additional liquidity injection measures by RBI including an open market operation, fall in US treasury yields and indication of further slowdown in Chinese economy as the country suffered a rare trade deficit of $22.8bn this month as exports slumped 18%.

However, the trend of bright mornings but dark evenings continues with most of the gains of the week getting erased in closing hours of the week. Trade deficit for February 2014 was reported at a much improved $8.13bn compared to $9.92bn previous month.

The index of industrial production for January 2014 also turned positive at 0.10%. Headline as well as core CPI inflation in February fell further to 8.10% vs. 8.79% and 7.90% vs. 8.10% respectively. While headline WPI inflation was reported lower at 4.68% vs. 5.05% last month, core WPI inflation inched a tad higher at 3.11% vs. 3.00% even though the momentum slowed down.

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Rupee strengthened to an intra-week high of 60.59 on continued weakness in dollar in global market before giving up most of the gains in the last two trading sessions to close weaker at 61.19 vs. 61.09 last week.

RBI rolled over expiring term repo by conducting fresh term repo and announced an additional OMO to inject liquidity ahead of advance tax outflows. Buoyed by these positive developments, benchmark 10Y government bonds continued to rally through most of the week to touch an intra-week low of 8.70%.

On continued concerns on Ukraine and slowing Chinese economy, US 10 year yields eased to a low of 2.61% before closing at 2.65% vs. 2.79% last week. However, as has been the trend in past weeks, bonds gave up most of the gains in closing hours on profit booking by traders to close at 8.80%, just 1bps lower compared to 8.81% last week. Ten year AAA bonds recovered 4bps to 9.72% from 9.76%, while five year AAA bonds eased 5bps to 9.75% from 9.80%. However, the closing levels of corporate bonds do not reflect the eleventh hour selling in government bonds.
 
Though liquidity situation stayed comfortable, pressure was seen on overnight CBLO rates ahead of advance tax outflows towards close with rates getting closer to marginal standing facility rate of 9% and very short term CD/CPs of two-three days maturity being offered at up to 9.50%. The weighted average cut off at 21 day term repo also stood higher at 8.79% reflecting the March crossover premium. Liquidity adjustment facility borrowings stood higher at Rs 36,471 crore from Rs 26.770 crore. The borrowings from MSF window were negligible. Three month PSU Bank CD rates fell 3bps to 9.68% from 9.71%, while 1Y PSU Bank CD rates dropped 5 bps to 9.64% from 9.69%.
 
All eyes would now be on FOMC meet this week and monetary policy review on April 1. Market expects another taper of $10bn and a status-quo from RBI. Traders would look for guidance on future course of action. With banks and mutual funds focused on fiscal year end, money markets will steal all the attention.

Overnight rates may remain elevated on strong year end demand and positioning in money market instruments in anticipation of a rally in early April. Bonds for now are expected to remain lacklustre. However, macro fundamentals are indicating seasonal improvement as in the last year as well. A pause by RBI may induce a quick rally in bonds in early April till the next years borrowing programmes set in with full momentum.  
 
Mahendra Jajoo is executive director & CIO - fixed income at Pramerica Asset Managers
 

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First Published: Mar 18 2014 | 10:41 AM IST

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