The 10-year G-Sec yield has shown an upward trend in the month of March 2012 mainly due to the fiscal deficit figure and borrowing programme for FY2013. It started rising from 8.23% on the first day of March 2012 and touched 8.60% on March 28 2012 when the borrowing programme for the first half of next financial year was announced. However, by the end of the month, it closed down to 8.54% due to unexpected announcement from the RBI of buying back the bonds through Open Market Operations (OMO).
The inflation rose to 6.95% on a year-on-year basis for the month of February 2012 as compared to 6.55% for the previous month of January 2012. After cutting CRR in January 2012, the Reserve Bank of India (RBI) further reduced CRR by 75 basis points to 4.75% on March 09, 2012 before Mid-Quarterly Review of Monetary Policy.
The CRR cut was done to ease liquidity situation by releasing Rs. 48,000 crores of liquidity into the system. The RBI announced its Mid-Quarterly Review of Monetary Policy on March 15 2012 and kept key policy rates unchanged. Union Budget 2012-13 was presented by the finance minister, where fiscal deficit number came to 5.1% of the GDP in FY2013 against 5.9% (revised) for FY2012. The Government on March 28 2012 announced that it will borrow Rs. 3.79 Lakh Crores from the market in the first half of FY 2013, which is over 65% of the total borrowing amount. This kept 10 year G-Sec Yields under pressure which touched to 8.60%. Going forward, we expect G-Sec yields to be above 8.40% - 8.60% for short term period due to the borrowing programme and liquidity deficit in banking system.