Debt Market Update Jan ‘14

In January, the Urjit Patel panel (set up by RBI) recommended using CPI inflation as the new nominal anchor, as it is the closest reflection of cost of living and inflation expectations.

The panel suggested adopting a longer-term target of 4% for CPI inflation with a band of +/- 2%. The committee’s main objective was to recommend steps to revise and strengthen the current monetary policy framework with a view to make it transparent and predictable.

On January 28, 2014, the RBI, based on an assessment of the current and evolving macroeconomic situation, decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 8.0%.

On January 30, 2014, the Federal Reserve decided to trim its bond purchases by another $10 billion, since it stuck to a plan to wind down its extraordinary economic stimulus despite recent turmoil in emerging markets.

This action was widely expected, although some investors had speculated that the US central bank might put its plans on hold given the jitters overseas.

The increase in repo rate coupled with Fed’s decision to trim bond purchases put pressure on the bond yields.

As on January 31

T – Bill

CD

1m

8.43%

8.40%

3m

8.81%

9.58%

6m

8.91%

9.63%

1yr

8.90%

9.65%

 

 

As on January 31

G – Sec

Corp. Bond

3yr

8.70%

9.73%

5yr

8.86%

9.73%

10yr

8.76%

9.66%

15yr

9.18%

9.69%

Outlook

RBIs focus on price stability and the recommendations of Urjit Patel committee, if accepted, would keep pressure on yields.

 

By Sachin Kathar
Debt Market

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

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