for the fortnight ended 19 November, 2010

Economy & Financial Markets Review

Domestic Developments International Developments G-sec Market
IIP Slows to 4.4% in September Demand for safe haven assets G-sec yields firm up as tight liquidity
decline as quantitative easing by saps demand
WPI inflation for October eases Fed sparks inflationary risks
marginally to 8.58% US 10-yr yield ends the fortnight at 10-yr yield rises by 4 bps to end at 8.0
2.87% as against 2.52% in the 3% as against 7.99% in the previous
August'10 WPI inflation revised previous fortnight fortnight
upwards to 8.82% as against Crude oil price retreats to end at
earlier estimate of 8.50% USD 81.98 a barrel
Government borrows Rs. 22,000 crore
Softening Trend in IIP and Inflation Has Raised during the fortnight
Expectations of a Pause in Rate Hike Program
20 12

18
10
16 Money Market
8
WPI Inflation (%)

14
IIP Growth Rate (%)

12
Tight liquidity condition persist
6
10
4
Call and CBLO rates end the fortnight at
8
6.54% and 5.86% respectively
6 2

4
0
2

0 -2
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
IIP Growth Rate WPI Inflation
Forex Market
MACROECONOMIC INDICATORS (Rs. Billion) Rupee treads lower in tandem with
sharp decline in equity markets
Variation
As on Variation over Rupee ends at 45.30/USD vis-a-vis
5th over the LRF of YOY %
44.23/USD during previous fortnight
Nov'10 fortnight March growth
Fortnightly average of 3M & 6M fwd
annualized premia at 6.72% & 6.27% as
against previous fortnight's level of
6.93% & 6.57% respectively

Equity Market
Chinese rate hike fears spook domestic
equity markets

Sensex and Nifty decline by 6.76% and

6.69% respectively
Gilt News 19, November, 2010

DOMESTIC DEVELOPMENTS

IIP Growth Slumps to 16 Month Low

Losing momentum for the second consecutive month,
IIP growth faltered to a 16 month low to 4.4% in Sep'10
after registering a poor 6.92% in Aug'10. On a
disaggregated basis, mining and electricity output
growth slowed to 5.20% and 1.7% respectively. On the
other hand manufacturing output which has 80%
weightage in the IIP basket grew at an annual pace of
4.50%. Manufacturing output has been mainly dragged
down by negative growth in capital goods segment
which contracted by 4.20% in Sep'10. Capital goods
output is mainly indicative of investment activity in the
economy and sharp decline in the same has turned into
a cause of concern. While consumer durables and
intermediate goods registered growth rate of 10.9% and
10.3% respectively. Cumulative industrial growth for the
period April to Sep 2010 stands at 10.2% as against
6.30% in the corresponding period last fiscal. Though
the cumulative figures are quite robust, the recent
volatility in the IIP numbers has cast doubt on the
sustainability of the growth.
October Inflation Marginally Down at 8.58%
WPI inflation for the month of October eased a tad to
8.58% as against 8.62% in Sep'10. Though food
inflation has eased to 14.13% in Oct as against 15.71%
in Sep, it still remains much above RBI's comfort level.
Inflation of manufacturing goods up ticked to 4.75% as
against 4.59% in the previous month. On the other hand,
fuel group inflation stood at 11.02%. Inflation for the
month of August'10 has been revised upwards to 8.82%
from earlier estimate of 8.50%. Despite several rate
hikes by RBI and favourable monsoons this year, WPI
inflation has remained sticky at elevated levels. Recent
uptrend in international commodity prices is also seen
exerting upward pressure on domestic inflation.

INTERNATIONAL DEVELOPMENTS
US Treasuries
US treasury yields rose consistently during the first half
of the fortnight reeling under pressure of huge supply
amid declining demand for safe assets. Auction of 3-yr,
10-yr and 30-yr paper during the first week induced
traders to shed holdings to make space for fresh supply.
Demand remained weak in the auction and cut-off yields
remained above market expectations especially for
long-term papers. Since the Fed reserve's purchases

2
 Gilt News 19, November, 2010

are focused towards short-term maturities, long-term

yields are expected to remain under pressure. Yields on
10-yr paper rose sharply towards the end of the first half
as expectations of European leaders initiating fresh
US Treaury Yields Firm Up as Quantitative steps to bolster the euro area's most-indebted nations,
Easing Induces Inflationary Concerns reduced demand for safe treasuries. Treasuries
3.00
continued with the losing streak with the start of the
2.90 second week as sharp surge in US retail sales in October
US 10-yr Yield (%)

dampened demand for safe haven assets. Sentiments

2.80
also turned cautious after a group of economists advised
2.70 the Fed to reconsider its quantitative easing program as
the same may trigger inflation. However towards the end
2.60
of the fortnight, treasuries pared losses and 10-yr yield
2.50 retreated from 2.95% levels inflation increased at a slow
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 17-Nov 18-Nov 19-Nov
pace and housing starts declined. Nevertheless,
announcement of auction supplies of USD 99 bn for the
nd
week starting 22 Nov'10 prevented further easing of
yields. On the last day of the fortnight, yields retreated
somewhat after Fed purchased USD 2.2 bn of securities
under its second round of quantitative easing program.
The 10-yr paper ended the fortnight at 2.87% as against
previous fortnight's close of 2.53%.

Global Economic Calendar COMMODITIES

Date Event Period Prior International Crude Oil

23-Nov Q-o-Q US GDP Q3 2.00%
23-Nov US Existing Home Sales Oct 4.53 Mn Crude oil prices remained range bound in the beginning
FOMC minutes from 2nd to 3rd of the fortnight hovering near two year high of over USD
24-Nov Nov meeting
86 per barrel. A strong dollar and fall in equities weighed
24-Nov US initial jobless claims 20-Nov 439K
24-Nov US new home sales Oct 307K on the market due to which rise in oil prices was limited.
30-Nov US Consumer Confidence Nov 50.20 However, unexpected decline in US stockpiles helped
3-Dec US Unemployment Rate Nov 9.60% crude oil price break the narrow range and surge to near
3-Dec Change in US non farm payrolls Nov 151K
3-Dec US Factory Orders Oct 2.10% USD 88 a barrel. Decline in US initial jobless claims also
bolstered the bullish sentiments. However, crude oil
pared the gains falling sharply on fears that interest rate
hike in China may lead to subdued demand. In the
Fears of Tightening Measures by China Trigger second half of the fortnight, crude oil price exhibited
Sell Off in Crude Oil weakness as European debt crisis and Chinese rate hike
88.0
fears continued to spook investors. Any tightening
87.0 measures taken by China to cool the heating economy
86.0 are expected to have an adverse demand for crude oil.
85.0
Snapping the first week's gains, crude oil crashed to fall
USD/barrel

near USD 80 a barrel on uncertain economic outlook.

84.0
Towards the fag end of the fortnight, crude oil managed
83.0
to pare the heavy losses partially and rose from four
82.0 week lows after dollar weakened against the euro. Surge
81.0 in manufacturing in the Philadelphia area too supported
80.0
sentiments. However on the last trading day of the
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 17-Nov 18-Nov 19-Nov
fortnight, crude fell again after China's central bank
ordered banks to increase reserves in a bid to cool the
heating economy. After touching a high of USD 88.63, oil
closed the fortnight at USD 81.51 a barrel as against
USD 86.85 a barrel in the previous week.

3
 Gilt News 19, November, 2010

Rupee Loses Steam Mirroring Sharp fall in FOREX MARKET

Equity Markets pee Gains As Fed's Decision
to Infuse Liquidity Bolsters Appeal of Risky Assets Rupee remained under pressure during the fortnight
44.2
owing to weak global cues. Rupee started the fortnight
44.4 on weak note as better-than-expected US jobs data led
to strengthening of dollar against most currencies.
44.6
Though, speculation over huge capital inflow in FPO of a
Rs/USD

44.8
major state owned company supported rupee. However,
towards the end of the first week, release of dismal
45.0
industrial production data leading to an over 400-points
45.2
in equity market index Sensex, triggered speculation of
capital outflows from domestic equities. In the second
45.4
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 18-Nov 19-Nov
half of the fortnight, rupee continued to weaken on
speculation that current account deficit may widen as
growth in exports lag behind imports. Rising crude oil
Annualised USD/INR Fwd Premia prices also pose significant risks to the widening gap
7.40 between exports and imports. Rupee snapped four days
7.20 of continuous decline and rose marginally after risk
7.00 aversion decreased on expectations that European debt
6.80 crisis may be prevented. However, on the last trading
day, rupee fell again on continued current account deficit
% p.a.

6.60

6.40
concerns. During the fortnight rupee fell by 108 paise
6.20
closing at 45.30/USD as against previous fortnight's
closing of 44.22/USD.
6.00

5.80
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 18-Nov 19-Nov
EQUITY MARKET
Fwd - 6 M Fwd - 3 M
Shrugging off the euphoria witnessed in the previous
fortnight, domestic equity markets went into a correction
mode with benchmark index Sensex closing at almost
two month low of 19,585. During the fortnight, markets
witnessed huge volatility and ended in the green only on
three trading days. Markets opened the fortnight on a
negative note snapping previous fortnight's gains on
heavy profit booking across sectors. Though markets
Major Stock Indices bounced back the next day on emergence of buying in
blue chip stock after a day of correction, the momentum
4-Nov-10 19-Nov-10 % change could not be maintained. Equity markets witnessed
Indian strong sell off and continued to decline for three
Indices
consecutive days. Investors preferred to continue with
Sensex 21,005 19,585 -6.76%
Nifty
the profit-booking streak to free up funds for Power Grid
6,312 5,890 -6.69%
FMCG 3,716 3,595 -3.25%
FPO. Poor quarterly results of Bharti Airtel and DLF also
IT 6,200 5,890 -5.01% dampened sentiments. Fears of tightening measures by
Banking 15,066 13,705 -9.03% China to contain inflation spooked the makets resulting
Auto 10,330 9,941 -3.77% in benchmark index Sensex shedding 432 points on the
Capital last day of the first week. Poor IIP growth figure also
Goods 16,702 15,625 -6.44% intensified selling pressure in the markets. With the start
Healthcare 6,705 6,580 -1.86% of the second half of the fortnight, equity markets pared
PSU 10,574 9,648 -8.76% losses driven by buying at lower levels. Nevertheless
World
Indices intraday remained highly volatile with market witnessing
Dow Jones 11,444 11,204 -2.10% alternate bouts of buying and selling. After a day of gain,
Nikkei 9,626 10,022 4.12% equity markets crashed by the most in six months falling
FTSE 5,875 5,733 -2.43% below 20,000 mark as continued sell of Chinese and

4
 Gilt News 19, November, 2010

European markets triggered strong sell off. Though

markets managed to pare losses partially, the recovery
could not last. On the last trading day of the fortnight,
markets plunged sharply with Sensex shedding 345
points. During the fortnight, Sensex and Nifty declined
by 6.76% and 6.69% respectively.
Heavy Repo Injection Amid Persistent
Tightness in Liquidity MONEY MARKET
140000

120000 During the fortnight, banking system continued to reel

100000
under severe tightness in liquidity as demand for funds
remained strong. The crunch in the systemic liquidity is
(Rs. Crore)

80000
largely attributed to equity sales of PSU companies
60000
which have attracted huge investor interest. Also,
40000 withdrawal of funds in the festive season and lack of
20000
government spending has further aggravated the
situation. OMO auction conducted in the previous
0
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 18-Nov 19-Nov fortnight also didn't have much impact on the deficit in
Reverse Repo Repo
the liquidity. During the fortnight, RBI heavily infused
funds of over Rs. 1,00,000 crore under the LAF window.
Repo injections during the fortnight averaged at Rs.
1,10,526 crore as against Rs. 84,507 crore in the
Yield Movement - 91 Day and 364 Day T- Bills previous fortnight. Call rates ended the fortnight at
7.50 6.54% as compared to 6.95% in the previous fortnight.
7.00 While CBLO rates ended the fortnight at 5.86% vis-à-vis
6.50
T- Bill
previous fortnight's closing of 6.32%.
6.00 TREASURY BILLS
Repo Rate
Yield (%)

5.50
Primary Market
5.00

4.50
Severe crunch in systemic liquidity and firm money
91 - Day
T - Bill market rates resulted in T-bill auction cut offs rising
4.00
further from previous fortnight's levels. In the first week's
3.50
7-Apr 28-Apr 19-May 9-Jun 30-Jun 21-Jul 11-Aug 1-Sep 22-Sep 13-Oct 3-Nov auction, 91-day T-bills yield rose from 6.77% during the
previous fortnight to 6.85%. On the other hand, yield on
182-day T-bill rose sharply to 7.17% as against 7.06% in

Details of all the Treasury bill auctions held in the fortnight ended 19th Nov'10 have been tabulated as under:
(Rs. Crore)

Particulars 91 Day 182 Day 364 Day

Date Of Auction 10 Nov 16 Nov 10 Nov 16 Nov
Cut-off Price (Rs) 98.32 98.33 96.55 93.30
Implicit Yield (%) 6.85 6.81 7.17 7.20
Weighted Avg. Yield (%) 6.81 6.81 7.12 7.18
Competitive Bids Received 11396.62 14575.35 5020.00 5140.00
Competitive Bids Accepted 4000.00 4000.00 2000.00 2000.00
Non-Competitive Bids
Accepted 3075.00 500.00 500.00 Nil
Total Bills Issued 7075.00 4500.00 2500.00 2000.00
Of which MSS Nil Nil Nil Nil

5
Gilt News 19, November, 2010

the previous fortnight. In the second week, 91-day T-bill cut off
yield eased marginally to 6.81%. However, yield on 364-day
T-bill firmed up to 7.20% as against 7.07% in the previous
SGL Volumes - Treasury Bills
2000 fortnight
1800 1754

1600 1576 Secondary Market

1400

1200 1144
Trading volumes during the fortnight declined to Rs. 5,276
Rs Crore

1000 crore vis-à-vis previous fortnight's level of Rs. 7,068 crore.

800
801
Average daily trading volume stood at Rs. 586 crore.
600 Segment wise trades in treasury bills are given in the exhibit.
400
Highest volume of Rs. 1,754 crore was witnessed in the 15 to
200

0
91 days residual maturity bucket. During the fortnight Public
Upto 14 days 15-91 days 92-182 days
Residual Maturity
183-364 days
Sector Banks, Foreign Banks, Private Sector Banks and
Mutual Funds were net buyers while Primary Dealers were
net sellers.
GOVERNMENT SECURITIES
Primary Market
During the first week, as per the schedule GOI raised Rs.
11,000 crore through issue of 7-yr paper 7.99% GOI 2017 for
Rs. 4,000 crore, 10-yr paper, 7.80% GOI 2020 for Rs. 4,000
crore and 30-yr paper, 8.30% GOI 2040 for Rs. 3,000 crore.
Concerns of devolvement amid tight liquidity conditions
prompted PDs to demand slightly higher underwriting fees in
the auction compared to the previous week's auction. The
three papers were underwritten at 0.52 paise, 0.87 paise and
Primary Auction Details 0.67 paise respectively. Auction also witnessed subdued
interest with lowest demand and bid-to-cover ratio in 30-yr
Date Security Notified Underwriting Competitive Non- Cut-off Bid-to-
Amount fee cut-off Bids competitive cover paper at 1.84. On the other hand bid to cover ratio of 7-yr and
(Rs. Cr.) (paise ) accepted Bids Rs. Yield Ratio
10-yr paper stood at 2.11 and 2.12 times respectively. 7.99%
(Rs. Cr.) accepted
(%)
(Rs. Cr.) GOI 2017 was auctioned at a price of Rs. 99.98 (YTM:
7.99% GOI 2017 4000 0.52 3994 6 99.98 7.99 2.11
12-Nov 7.80% GOI 2020 4000
7.99%), 7.80% GOI 2020 was subscribed at Rs. 98.03 (YTM:
0.87 3994 6 98.03 8.10 2.12
8.30% GOI 2040 3000 0.67 2996 4 97.91 8.49 1.84 8.10%). The 30 yr paper was auctioned at lower than
7.17% GOI 2015 4000 0.36 4000 0 97.43 7.85 2.59 expected price of Rs. 97.91 (YTM: 8.49%).
19-Nov 8.08% GOI 2022 4000 0.46 3999 1 99.92 8.09 2.06
8.26% GOI 2027 3000 0.56 2969 31 98.56 8.42 2.41 In the second week, GOI raised another Rs. 11,000 crore
Total 22000 21951 49 through issue of 5-yr paper 7.17% GOI 2015 for Rs. 4,000
crore, 12-yr paper, 8.08% GOI 2022 for Rs. 4,000 crore and
17-yr paper, 8.26% GOI 2027 for Rs. 3,000 crore. Improved
market sentiments on account of favourable economic data
releases resulted in better demand in the auction.
Underwriting fees declined to 0.36 paise, 0.46 paise and 0.56
paise respectively for the three papers. 7.17% GOI 2015 with
the highest bid to cover ratio of 2.59 was auctioned at a price
of Rs. 97.43 (YTM: 7.85%). On the other hand 8.08% GOI
2022 was subscribed at Rs. 99.92 (YTM: 8.09%). The 30 yr
paper was auctioned at price of Rs. 98.56 (YTM: 8.42%).
Secondary Market Developments
G-sec market remained subdued during the first half of the
fortnight and the undertone was bearish amid tight liquidity
conditions. Sharp surge in money market rates reduced

6
 Gilt News 19, November, 2010

demand and bonds continued to weaken over the first week.

Yield Curve Movement Share sale of PSU company Power Grid attracted huge bids
8.80 draining out considerable liquidity from the system. Besides,
8.60 heavy outflows on account of SDL, T-bill and G-sec auctions
8.40
19th Nov
also exerted further pressure. Markets also shrugged off
8.20
sharp fall in IIP growth to 4.40% for the month of September
Yield ( % )

8.00
as against expectation of 6.4%. Rising trend in US treasury
7.80
4th Nov yields and crude oil prices further added to the negative
7.60
sentiments. Tight liquidity conditions continued to weigh on
7.40
the bond market in the second half of the fortnight as well.
7.20

7.00
Though sharp decline in IIP growth to 4.4% provided some
0 2 4 6 8 10 12 14 16
Tenor (yrs)
18 20 22 24 26 28 30
support to the market, much easing was not witnessed and
yields continued to trade steady amid subdued demand.
However post release of monthly inflation data, yields
treaded downwards on growing expectations of a pause in
interest rate hike cycle. Both IIP and inflation numbers gave
respite to the market and 10-yr yield after touching a high of
ended at 8.03% as against previous fortnight's closing of
7.99%. Spread between 30-yr and 1-yr papers remained flat
at 132 bps from previous fortnight.
Most Traded Securities
Trading Volumes
8.08% GS 2022 4495
Total trading volumes during the fortnight declined sharply to
7.17% GS 2015 5046 Rs. 63,748 crore as against Rs. 95,822 crore in the previous
fortnight. The first week's average daily trading volume stood
7.80% GS 2020 10502
at Rs. 7,089 crore vis-à-vis second week's level of Rs. 7,076
7.99% GS 2017 13360
crore. The highest single day trading volume was Rs. 8,633
crore. Top two traded securities 8.13% GOI 2022 and 7.99%
8.13% GS 2022 15314 GOI 2017 cornered 59% of the top five traded securities
volume. During the fortnight Public Sector Banks, Private
0

4000

8000

12000

16000

Traded Volume (Rs. Crore) Sector Banks and Mutual Funds were net buyers while
Foreign Banks and Primary Dealers were net sellers.
OUTLOOK
Dated Securities Trading Volumes In the previous fortnight, bond markets remained under
10000
pressure owing to severe shortage in liquidity. However
8633

7923

sentiments were revived towards the end of the fortnight on

7404

7170

6937
6837

6752

6275

7500
back of downward trend in both weekly and monthly inflation
5818
Rs. Crore

figures. Moderation in inflation clubbed with dismal IIP growth

5000
rate has induced expectations that the central bank may not
be in a hurry to raise interest rates for the sixth time this year.
2500
In the coming fortnight, liquidity situation will continue to be
crucial for the bond markets. Continuous outflows on account
0
8-Nov 9-Nov 10-Nov 11-Nov 12-Nov 15-Nov 16-Nov 18-Nov 19-Nov of PSU IPOs and FPOs and absence of government
spending has left a severe dent in the systemic liquidity. In the
coming fortnight, yields are expected to trade with a
downward bias as lack of auction next week may induce
demand in secondary market. Any advent of government
spending in coming weeks will also augur well for the bond
market.

7
Gilt News 19, November, 2010

SPREAD MONITOR
TTM YTM Change in Spread Over One-Year Paper
(yrs) 4-Nov 19-Nov YTM (bps) 150

364 Day T Bill 1.00 7.08 7.15 7 125

4th Nov
7.40% GOI 2012 1.46 7.17 7.15 -2
100
7.32% GOI 2014 3.92 7.50 7.54 4 19th Nov

Spread (bps)
7.17% GOI 2015 4.57 7.78 7.86 8 75

7.02% GOI 2016 5.75 7.90 7.99 9 50

7.99% GOI 2017 6.64 7.85 7.94 9 25

7.46% GOI 2017 6.78 7.87 7.96 9
0
6.90% GOI 2019 8.65 8.15 8.22 7 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Tenor (yrs)
7.80% GOI 2020 9.46 7.99 8.03 4
7.94% GOI 2021 10.52 8.13 8.20 7
8.08% GOI 2022 11.71 8.04 8.09 5
8.13% GOI 2022 11.85 8.02 8.07 5
8.26% GOI 2027 16.72 8.37 8.42 5
7.50% GOI 2034 23.74 8.45 8.53 8
7.40% GOI 2035 24.82 8.46 8.53 7
8.33% GOI 2036 25.57 8.46 8.54 8
6.83% GOI 2039 28.19 8.47 8.54 7
8.30% GOI 2040 29.64 8.40 8.47 7

GOVERNMENT SECURITIES (Rs. crore)

INFLOWS OUTFLOWS
Coupon Scheduled
Date Security Receipts Date Security auction amount
23-Nov 12.60 % 2018 796 5-9 year 3000-4000
11.50 %
2011(II) 633 10-14 year 4000-5000
20 year &
9.00 % 2013 79 Nov 29- Dec 3 above 2000-3000
24-Nov 7.94%2021 1945
10.95%2011 657
9.81% 2013 540
10.00 % 2014 117
30-Nov 10.25% 2021 1343
1-Dec 10.25 % 2012 81
Total
Total Inflows 6,190 Outflows 11,000

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