CPI inflation path is critical – Debt Market Review

RBI on Feb 5, 2014 announced that it has successfully conducted the gilt-switch worth Rs. 27,000 Cr for securities with maturities of 2014-15 and 2015-16. The switching of GOI securities eased the redemption pressure lined up for 2014-15 and 2015-16.

The government tabled its interim budget for 2014-15. As per the revised estimates, the fiscal deficit for FY14 is contained at 4.6% of GDP (better than 4.8% stated in 2013-14BE). The fiscal deficit for FY15 is budgeted at 4.1% of GDP standing at Rs 5,28,631 Cr. The gross market borrowing for FY15 is budgeted at Rs 5,97,000 Cr while the net borrowing is budgeted at Rs 4,57,321 Cr.

The interim budget failed to have a positive impact on the bond market. Although gross borrowing below Rs 6 Lakh crore was welcomed, there has been an increased discomfort with respect to quality of fiscal consolidation.

Combined CPI inflation came in at 8.79% for Jan-14 (9.87% in Dec-13) and the WPI inflation for Jan-14 fell sharply to 5.05% (6.16% in Dec-13) led by correction in vegetable prices.

RBI has been emphasizing the need to bring down the high level of inflation to make headroom to support growth. Going forward, the outlook for Headline CPI inflation has improved and is expected to clock in a number near RBI’s estimate.However, the path for core CPI inflation will also be critical for RBI’s stance on the monetary policy.

On February 26, 2014, RBI governor Raghuram Rajan said that current interest rates are “appropriately set”, hinting that rates are likely to remain unchanged in the forthcoming monetary policy in April 2014. Mr. Rajan also set a consumer price inflation (CPI) target of 8% for January 2015 and 6% for January 2016, adding that RBI will not administer shock therapy to a weak economy and would aim to bring down prices over time.

As on February 28

T-Bill

CD

1m

8.41%

8.50%

3m

9.09%

9.90%

6m

9.07%

9.90%

1yr

8.98%

9.82%

 

On February 28

G-Sec

Corp Bond

3yr

8.80%

9.80%

5yr

8.97%

9.84%

10yr

8.86%

9.74%

15yr

9.28%

9.72%

Written By: Sachin Kathar

Debt Market Desk

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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