The system is facing a potential liquidity squeeze as it goes into the 31st March 2014 fiscal year end. The auction of 900 MHz and 1800 MHz spectrum has seen bids crossing Rs 500 billion. Once the auction gets over the successful bidders will have to either pay the full amount upfront within 10 days of receiving intimation or will have to pay upfront of 33% for 1800 MHz and 25% for 900 MHz and the rest can be paid in installments after a moratorium of 2 years.
Assuming that the auction closes with bids of around Rs 600 billion and successful bidders choose to pay 25% to 33% upfront, the outflow from the system this financial year will be around Rs 150 billion to Rs 200 billion. Over and above the spectrum auction outflows, the 15th March 2014 fourth quarter advance tax outflows is expected at over Rs 500 billion leading to an outflow of around Rs 650 billion to Rs 700 billion.
The government is running a surplus that is estimated at Rs 500 billion with the RBI and is unlikely to spend it in the coming months given elections. The government will go into the new fiscal year with a surplus of around Rs 1200 billion. The system will be deficient to the extent of the government surplus.
The system is accessing the RBI repo and term repo window for funds to fund its cash requirements. Banks borrowing under repo was Rs 290 billion and under term repo was Rs 690 billion as of 7th February 2014. The system is in liquidity deficit of Rs 980 billion. Advance tax, spectrum auction outflows and fiscal year end funding requirements for banks would take up system liquidity deficit to around Rs 2000 billion.
RBI would have to take liquidity measures such as increasing amounts in repo and term repo auctions or even lowering the CRR (Cash Reserve Ratio) that is currently at 4% of NDTL (Net Demand and Time Liabilities) to ease system liquidity and enable banks to meet year end credit requirements.
Bond yields fell last week on the back of the government cancelling the Rs 150 billion auction that was deferred previously. Government cash position is comfortable and it did not require borrowing more. The ten year benchmark bond the 8.83% 2023 bond saw yields falling by 7bps week on week to close at levels of 8.71%.
The government estimates of GDP growth for the full year 2013-14 at 4.9% is well below budget 2013-14 estimates of over 6%. Manufacturing is expected to contract this fiscal leading to worries on the state of the economy. Bond markets are unlikely to factor in rate cuts by the RBI on the back of the GDP numbers as the second half 2013-14 GDP growth is expected at 5.2% against the 4.6% growth seen in the first half. However markets will look for liquidity easing measures by the RBI to improve flow of credit to the economy.
Certificate of Deposit (CD) yields rose last week on the back of tight liquidity conditions with three months and one year CD yields rising by 15bps and 10bps to levels of 9.6% and 9.65% levels respectively. Five and ten year benchmark AAA corporate bond yields stayed flat while five and ten year credit spreads rose by around 7bps each to close at levels of 60bps to 68bps respectively. Corporate bond yield curve is likely to invert on the back of tight liquidity conditions.
OIS (Overnight Index Swaps) market saw the curve shift down on the back of easing government bond yields. One and five year OIS yields fell by 8 bps and 3 bps respectively to close at levels of 8.67% and 8.42% and the five over one OIS spread flattened by 5bps to close at 25 bps levels. The spread is likely to stay inverted given expectations of tight liquidity conditions going into March 2014.