In line with the T-bill auction held on July 10, the first PIB auction of the new fiscal year also witnessed an end to the trend of declining cut-off yields. Just as what was already hinted by the recent T-bill auction, the PIB auction further pointed towards rate hike expectation of market participants.
Throughout the last quarter of FY13, cut-off yields for PIBs rode a downward trajectory, as inflation dropped successively and the induction of a pro-investment government built expectations of reductions in the discount rate.
Initially, the incoming government had claimed it would not be knocking the IMFs door for a new loan any time soon, so expectations of any sudden spike in the discount rate were further quashed.
But soon after the most recent auction (June 19), secondary market yields posted an increase of 43-78 basis points in different tenors. This was triggered by expectations of higher inflation on the back of budgetary decisions on indirect taxes and power tariffs front and an IMF programme in the offing. All these factors have built the case for a more hawkish monetary policy.
In tandem with secondary market upticks, the recent PIB auction boasted a rise of 74.74 basis points, 75.15 basis points and 60.21 basis points in the yields of 3-, 5- and 10-year bonds, while, as-usual, no bids were received for the 20-year bond.
Market participants expect Ramazan to further reveal the CPI direction, thereby paving way for more clarity in market expectations. Although, the PIB auction garnered skimpy participation this time around, one thing that is well substantiated is that monetary easing will probably not continue in the near future.
PIB Auction Profile (17-July-2013)
Bond Tenure Auction Target Rs(mn) Participation Ratio Cut-off Yield
3-year 15,000 0.50 10.4366%
5-year 15,000 0.43 10.9018%
10-year 15,000 0.34 11.6517%
20-year 5,000 - -