I-Sec foresees positive sentiment despite downgrading by Fitch

Our Banking Bureau

Mumbai, June 3: Though the prices in the government securities market slid by around 50 paise on Friday, after Fitch downgraded the outlook on India’s sovereign ratings to ‘negative’ from ‘stable’, the ICICI Securities and Finance Company (I-Sec) Ltd predicts that negative sentiment in the market will soon wear off.

With ample liquidity in the system and positive interest rate outlook (which remains unchanged by the cut in ratings outlook), yields at the 7-year plus segment is expected to start moving southward once again, especially if the auction announcement is delayed to next week. The liquidity will continue to be comfortable even though incremental coupon and redemption inflows for the week are a mere Rs 350 crore (net of T-Bills). Average unavailed refinance for the last reporting fortnight stood at around Rs 2,900 crore. Avearge daily repo amounts for the fortnight were another Rs 3,350 crore, thus implying a significant liquidity cushion of around Rs 6,250 crore.

Ways and Means Advances (WMA) to the central government as on May 25, stood at Rs 13,413 crore. Adjusting for salary, coupon and redemption payments for the period since then to the end of the current week, there is a possibility that the WMA balance would breach its limit in the current week. "Market fears of an impending issuance are thus justified. But, with advance tax inflows in mid-June, any such auction is unlikely to be for a large notified amount," I-Sec said. The prices in gilts market has been rallied in the first part of the week. The auction of the 12-year and the 20-year dated-stocks for a cumulative amount of Rs 5,000 crore was through comfortably. Cut-off rate of 10.25 per cent for the 20-year stock was almost 20 basis points (bps) lower than the market rate for that segment on the preceding Saturday. The security witnesses large trading volumes, in spite of only 2,000 crore of available stock, and the security rose to Rs 101.13 (10.12 per cent YTM, s.a.). This security extracted a considerable 10 bps premium over the off-the-run 11.60 per cent, 2020 security, which was trading around 10.23 per cent at the time. The yield levels achieved last week market the lowest level ever for the extreme long end.

The auction of 12-year stock was also through comfortably with a cut-off rate of 9.81 per cent, or around 10 bps below the prevailing market rate the previous week. The private placement of Rs 5,000 crore of the 10.25 per cent, 2021 security added to the positive sentiment. The rally was stoked further when the expected open market sales did not eventuate. "The yield curve is rather steep at the medium-end of the maturity spectrum. Persistently low overnight rates have led short-maturity yields lower by 10-20 bps over the last week. The sentiment inversion because of the rating outlook revision caused the seven-year and longer maturity segment to end the week around the previous week’s levels,’’ the report said.