Debt Market Review

The month of November 2011 saw the liquidity in the system remain tight. The net LAF infusions by RBI (i.e. amount borrowed by banks from RBI) under its daily LAF repo auctions, over the past couple of weeks remained close to or at times above 2% (~average of Rs. 120,000 Crs) of the NDTL. (Net Demand & Time Liabilities), i.e. total liabilities of banks which may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities.
Liquidity in the banking system is expected to tighten further next week as banks and companies will start making payments towards Oct-Dec advance corporate tax, the last date for which is Dec 15, 2011. Systemic liquidity in the banking system may tighten further if the Reserve Bank of India intervenes aggressively in the foreign exchange market to cap the rupee's fall against the dollar. In November so far, the rupee has weakened ~5% to 6% against the dollar owing to the growing concerns over the Euro-zone sovereign debt crisis and heavy dollar purchases by oil importers.
RBI has announced OMO of around Rs. 20,000 Crs and is a balancing strategy to primarily infuse liquidity and partly to support additional government borrowing. It is not going to be inflationary in our view — unless there is an excess of OMO — which we don't think will happen.
Second quarter (July - Sept 2011) GDP estimates were released on November 30, 2011. Q2 FY 12 GDP posted a growth rate of 6.9% much in line with consensus expectations of 6.9% but lower than our expectations of 7.2%. In Q1 FY 12, growth had come in at 7.7% while in Q2 of FY 11, growth was at 8.4%. On an YTD basis, growth for FY 12 is at 7.3% compared to 8.6% in the first half of FY 11.
The Q2 FY 12 growth seems to be confirming the fears of a slowdown in the economy. It was the lowest growth rate in more than two years now. On the back of glaring supply side bottlenecks, expected fiscal slippages, subdued confidence levels and weak global economic environment, we have revised our growth forecast downwards from 8.1% to 7.2% for FY 12.