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The closing week of financial year displayed characteristic liquidity tightening with borrowing under the liquidity adjustment facility hitting a three-month high of Rs 1.75 lakh crore. On the last working day, overnight rates shot up to 13% with three-four day bank certificates of deposit trading up to a high of 15%. The sentiment in the government securities market continued to worsen with benchmark 10-year yield approaching the 8% mark in intra-week trades. It finally closed at 7.95%, up by 8 basis points for the week. Post monetary policy on March 19, the market shifted focus on large supplies in the next year. Further, fresh uncertainties in Cyprus and unsettling comments from other coalition parties following DMK’s exit displayed more likelihood of weaker global environment and digression from reforms and fiscal consolidation with heightened probability of an early election. A large current account deficit of $32bn for the December quarter at a record high of 6.7% of GDP suggests prolonged tightness in liquidity. With RBI still concerned with high consumer price inflation alongside the current account deficit, the market is not very optimistic of outsized open market operations until the bond yields attain a distress level.
This however factors in a more negative assessment of economic environment than the recent trends indicate. Recent ground feeds suggest a softening in prices of items of daily consumption like eggs, sugar, vegetables and some fruits. For the week, corn, rice and wheat prices were down in international markets. This is yet to reflect though in CPI numbers. Early monsoon trends thus would be very crucial in the direction that market may take in late April.
With the large cash balance of close to Rs 80,000 crore with the government likely to be released in the system in early April, liquidity is likely to improve significantly in coming weeks. Anticipating this, money market yields have already come down by close to 75-100 bps from February highs and are now in line with the repo rate and liquidity conditions. However, fresh seasonal inflows into liquid mutual funds beginning April will most likely lead to one more round of easing by 25bps in short term rates.
