>DEBT OVERVIEW OCTOBER 2009(MOTILAL OSWAL)

MARKET ROUNDUP

In the month of September 2009 we saw a volatility Bond Market. Government bonds yields moved down weak on hope of hike in HTM (Held on Maturity) limits of banks. The RBI (Reserve Bank of India) had indicated that they are evaluating proposals for a hike in HTM category from current levels of 25% of NDTL (Net Demand and Time Liabilities). The market is expecting at least a 2% hike in HTM and a mid year transfer of securities to HTM portfolio from mark to market portfolios. A 2% hike in HTM would mean banks have an additional room of Rs.80,000 crs to absorb government bonds into their books. A mid year transfer of securities from mark to market portfolios to HTM portfolio will enable banks to escape higher provisioning if yields rise further. The HTM news is largely discounted at current levels of yields and if RBI disappoints the market will react negatively.

The 10 year benchmark bond, the 6.90% 2019 bond yield slip down by 25bps & closed at 7.19% levels at the end of the month. The 5 yrs benchmark bond, the 6.07% 2014 bond saw yields move down by 10bps to close at 7.17% levels. On 7th Sep 09 Comments by a senior Finance Ministry official, who remarked that the government was likely to finish most of its planned market borrowing for FY10 by January and was likely to stick to its market borrowing target of Rs.4.51 lakh cr, fanned this view. The 10-year benchmark 6.90%, 2019 government bond ended at Rs.97.27 or 7.2915% yield up from Friday's closing of Rs.96.08 or 7.4673% yield.

Even Corporate bond yields were moved down, 5 yrs benchmark bonds traded at 8.46% levels down by 13bps while 10 year benchmark bonds traded at 8.80% levels. 5 year spreads closed at
122.10bps levels while 10 year spreads closed at 132.10 bps levels on month end.

Indian government's fiscal deficit rose 56.0% on year to Rs.1.823 lakh cr during Apr-Aug, the first five months of 2009-10, accounting for 45.5% of the Budget target. Indian government's total receipts in the first 5 months declined 1.0% to Rs.1.610 lakh cr, while net tax revenues declined 14.8% to Rs.1.068 lakh cr; total spending during Apr-Aug rose 22.8% from a year ago to Rs.3.433 lakh cr. Government's tax collections in August fell 13.1% on year to Rs.32300 cr while gross tax collection in the first 5 months of FY10 declined 11.6% to Rs.1.683 lakh cr.

Inflation as measured by the WPI (Wholesale Price Index) turned positive after 13 weeks in the data as on Sep 5 at 0.12%. As on Sep 12 Inflation rate based on the Wholesale Price Index rose to 0.37% mainly on account of an increase in primary articles and manufactured products. Planning Commission Deputy Chairman says that India's headline inflation rate based on the Wholesale Price Index may move out of the comfort band of 4.0-5.0% by March due to pressure on prices.

To see full report: DEBT OVERVIEW