{LONGTERMINVESTORS} Debt Market Update for the week ended January 29, 2016

February 03, 2016 Debt Market Update   Debt Market Update for the week ended January 29, 2016   Monetary Policy Update The Reserve Bank of India (RBI) kept all rates on hold in the policy review meeting today. The lack of a rate cut was expected, although the market was hopeful of some liquidity measures, given the current deficit of almost Rs1,50,000 crore. In that respect, it was disappointing. However, the RBI governor has assured the market that the central bank will keep call rates close to repo and will deploy all possible tools to manage the liquidity deficit. Growth has lost some momentum in Q3 owing to weak agriculture and industrial growth. The services sector indicators remain mixed. However, prospects of rabi crop are improving and industrial activity may get some relief from a pick-up in corporate profitability on the back of declining input cost. Some categories of services are also expected to gain momentum on expectations of higher economic activity in the coming months. GVA growth for the current financial year is retained at 7.4% with a downward bias whereas for the next year it is pegged higher at 7.6%. On the Consumer Price Index (CPI) front, the headline inflation may fall in the near term on ongoing disinflation in the prices of primary articles. However, the so-called core inflation has been rising for the fourth successive month and while goods inflation has been falling, services inflation has been sticky since September 2015. Household inflation expectations remain elevated and the rate of increase in corporate staff cost has picked up. Overall, assuming a normal monsoon and the current levels of oil and exchange rates, the RBI expects the CPI to be "inertial" and be around 5% by the end of FY2017. However, it emphasises that the implementation of 7th Pay Commission's recommendations has not been factored in these projections whereas risks remain even from the monsoon and geo-political events. Given the current situation we maintain our bias for short-term funds/accrual funds. Liquidity The call money rate remained below the RBI's repo rate for most part of the holiday shortened week as the government's month-end spending supported cash conditions. Earlier in the week, liquidity was tightened on increased demand for funds from banks on account of a truncated week. Also, the demand for funds usually remains strong at the beginning of a reporting fortnight as banks prefer to meet most of their reserve requirements in the first week itself. However, the central bank's liquidity infusion via the variable rate repo window helped eased the liquidity condition. Meanwhile the call rate ended at 7.20% on January 29, 2016 vis-à-vis 7.30-7.40% on January 22, 2016.   Bond Prices Government bond prices were range-bound due to mixed cues in the shortened trading week. The 10-year benchmark--7.72%, 2025 bond--ended at 7.78% on January 29, 2016, flat as compared with the previous week's close, while the newly issued 10-year 7.59%, 2026 bond, too ended steady at 7.64% on January 29, 2016 as compared with the previous week's close. Weakness in the rupee and caution ahead of the US Federal Open Market Committee meeting outcome weighed on buying support. Fresh supply of Gilts on January 29, 2016 in addition to state loan supply earlier in the week also reduced the demand for dated securities. Higher than expected cut-off yields at the state loan auction dampened the demand for dated securities earlier in the week. However, sentiment remained positive on expectation of more open market bond purchase auctions by the RBI. Other Updates The rupee ended its intra-week lows against the dollar as global risk appetite was boosted by easing measures announced by the Japanese central bank. Dollar sales by exporters and rise in domestic stock markets also aided the local currency. Earlier in the week, the rupee was under pressure on persistent dollar demand from oil importers and caution ahead of the US Federal Reserve meeting.   Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article. Regards, Sharekhan Fundamental research team www.sharekhan.com

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