Wednesday, August 24, 2011 11:43 Hrs IST
We Expect Liquidity to Worsen Due To Festival Related Withdrawals
DSP BlackRock Mutual Fund - Debt Market Overview
• The Benchmark 10 Yr government bond yield rallied from 8.45% pa in the beginning of the month to 8.25% pa as on August 17, 2011
• 3M Bank CD yields moved from around 9.13% pa at the beginning of the month to around 9.18% pa as of 17 August 2011. 12M Bank CD yields moved from 9.80% pa to around 9.63% pa during the same period.
• The index of industrial production, or IIP, rose 5.6% in May from a year ago. Manufacturing accounts for about 75.5% overall industrial output. Eight of the 22 manufacturing sectors reported a contraction in output during the month. Production of capital goods, an indicator of investment activity, expanded only 5.9% in May, against 7.3% in the previous month, while that of consumer durables rose 5.2%, compared with 3.7% in April
• Headline inflation eased to its eight-month low at 9.22 per cent in July from 9.44 per cent. The non-food category in primary articles recorded a drop to 15.51 per cent in July from 18.57 per cent in June. The fuel and power category also observed a falling trend, from 12.85 per cent to 12.05 per cent in July.
• Bond markets continue to be extremely choppy on account of global uncertainties and disintegrating traditional correlations across asset classes such as US sovereign bonds, gold, oil etc
• Inflation still continues to be dominant macro concern of RBI. In most recent prints, inflation components such as food articles and primary articles have been demonstrating a respite. However, non-food manufacturing inflation (proxy for core inflation) continues be stubborn and sticky. We expect RBI to stay the course on monetary tightening and expect a 25bps hike in the next policy review meeting. We expect benchmark 10Y yield to remain range-bound with a declining bias, yet volatile.
• We expect subsequent monetary tightening to have limited impact on the money market yields in the near term. 1Y tenor of the OIS curve has rallied nearly 50 bps after last RBI rate increase of 50 bps, indicating rates to soften commensurately within next one year horizon.
• We expect liquidity to worsen due to festival related withdrawals and inflation as well as growth to moderate by 1Q 2012. Softening crude prices and adequate rains could provide just the catalysts needed to attain price stability going forward. However, fiscal deficit will continue to weigh on the sentiment.