Monthly ; Currency, VoA, Debt & Money Market Update
Read my note on Currency, India Macro, VoA, Debt and Money Market.
Download – Monthly Note
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Read my note on Currency, India Macro, VoA, Debt and Money Market.
Download – Monthly Note
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I am working with a gross borrowing of ~6.50tn. However note that I haven’t considered cash balance which government will carry next year. Cash balance may range anywhere between 400-550bn. Hence gross borrowing then, excluding cash balance, should come down to 5.95-6.1tn.
Gilts of ~1.68tn will mature in FY15. Incorporating redemptions, net borrowing should come at around 4.8tn. Conventionally RBI raises 90% of its net borrowing via Gsec. Hence total net Gsec supply could come at around 4.3-4.4tn considerably low vs. 4.69tn of net borrowing in FY14
Note – I haven’t incorporated switch effect anywhere above. If government, which had already bought ~120bn of FY15 debt, switches ~200bn by FY14 end then above figure of 4.3-4.4tn for net supply should fall by similar amount i.e. 200bn to 4.1-4.2tn.
I would add duration at current levels however on an incremental basis with a minimum 2 year horizon.
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Few statistical concepts(VaR, ES, Frequency Distribution, Kurtosis, Skewness) with regard to Indian 10Y bond price.
VAR ES FD Kurtosis Skewness (Download Excel)
Brief description on concepts
VaR – Value at Risk is measured in three variables: the amount of potential loss, the probability of that amount of loss, and the time frame. For example, a financial firm may determine that it has a 5% one month value at risk of $100 million. This means that there is a 5% chance that the firm could lose more than $100 million in any given month. Therefore, a $100 million loss should be expected to occur once every 20 months.
Source : http://www.investopedia.com/terms/v/var.asp
Expected Shortfall – Expected Shortfall is defined as the average of all losses which are greater or equal than VaR.
Source : http://www.statpro.com/glossary/expected-shortfall-or-conditional-var-or-c-var/
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Read my note on India Macro & Debt Market Update
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Banks are the biggest investor in the government bond market (holding ~34.5% of outstanding papers). Low interest among banking community to maintain high SLR indeed affects bond prices. Recent spike in yields can be attributed to RBI’s hawkish stance (fear of rate hikes), less OMO expectation, global factors and unfavorable demand supply dynamics. RBI releases Investment to deposit ratio on a fortnightly basis. Recent numbers stands at ~29.8%(Oct 18, 2013) i.e. out of every 100rs deposit, banks invest ~29.8 in mandatory securities as specified by the RBI from time to time. This ratio is fairly low compared to same period previous year. Investment to deposit ratio as on Oct 19, 2012 was seen at ~30.7%. Normally banks increase SLR holding during uncertain and low growth bouts. Current situation should compel banks to keep investment to deposit ratio high. However that is not the case. This deciphers bank’s fear of taking a hit on P/L due to undue volatility in bond prices. If banks were to maintain a year before ratio of ~30.7% then probably excess demand of 730bn (~15% of net FY14 borrowing) would have supported gilt prices considerably.
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Foreign investment in the Indian Government bond market
At a time when lots of chatter is going around with regard to domestic bonds being included in JP Morgan Index and easing some of the restriction over foreign investment in debt market, Ila Patnaik along with other co-authors writes up a paper presenting the logic foreign investment in the Indian Government bond market.
Listing down some text I found to be of importance
The share of the Government bonds outstanding that are owned by foreign investors is meager 1.6% as at end March 2013 far less than then emerging markets.
The Committee on Financial Sector Reforms chaired Raghuram Rajan also recommended steady opening of rupee denominated government and corporate bond markets to foreign investors.
When the policy rate is raised, there are two impacts. Borrowing becomes costlier within India, which reduces demand and thus cools the economy. In addition, when the interest rate in India is higher, more capital comes into India, and the rupee appreciates, which cools the economy. These two effects also work in reverse. When the policy rate is lowered, there is one channel working within India, where demand is increased. In addition, at a lower interest rate, less capital comes into India, and the rupee depreciates, which is expansionary. The second channel has been largely ineffective till date, owing to the capital controls that affect debt flows into India. Changes in the policy rate have a feeble impact on the rupee, as the channels through which foreign investment comes into Indian debt are clogged. While foreign investment into equity is open, equity investment has a low sensitivity to the policy rate. The main impact of monetary policy will come about through debt flows.
It is advantageous to Indian authorities if the bulk of global trading in the rupee takes place in India. When this activity takes place in India, it fosters a deep and liquid market with the comprehensive development of the bond-currency-derivative nexus. This will help improve the monetary policy transmission.
To the extent that foreign investors engage with Indian issuers on Indian soil, and to the extent that their currency trading activities take place in India, the revenue stream for financial services associated with these transactions will accrue to Indian financial firms. This will increase Indian GDP.
Percentage limits on foreign investment: Foreign ownership should be capped at a certain percentage of the outstanding government debt, such as at 10 or 15 percent of the total government debt.
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These recommendations were made on in May-12 by Gandhi committee in a bid improve liquidity in Gsec and IRD market. After reading this I think one should not ignore recommendations of various committees formed by RBI. The probability of majority of them being implemented is quite high.
Key recommendations:
(Note Government don’t issue securities with less than 5Y maturity)
No Update
(Note : India is set to switch debt worth of ~500bn)
No Update
(Note: Govt. has gradually increased FII limit and is mulling to get domestic bonds added to emerging market indices.)
(Note: Govt. has already reduced withholding tax for couple of years from 20% to 5%..Approximate revenue from FII withholding tax may be around 600cr)
No Update
No Update
No Update
No Update
Partly Executed
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Volume of G-sec is just ~1% of total outstanding Debt i.e. ~30000Cr of 30,00,000Cr outstanding debt. It is also knows that volume is more concentrated in top five liquid papers. Out of ~90Gilt papers only 15-20 are traded daily. There are few which haven’t been traded from many days and months. So how to value this illiquid securities. FIMMDA on a daily basis upload daily price of each G-sec/Floating paper and SDLs using Cubic Spline Valuation method.
Read FIMMDA circular on valuation
Below is the link to download daily price for G-sec and other papers.
http://www.fimmda.org/download/bloom/U28022013.xls.aspx
The reason why I have highlighted 28022013 is because you will have to tweak the link address to match with required date valuation. Above link is for 28th Feb 2013 valuation sheet. This helps one to understand at what price is RBI going to buy bonds (via OMO facility) if at all it announces to purchase illiquid securities.
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Refer this latest press release of SEBI (SEBI Circular) on enhanced FII debt limit wherein each head is described to its best. One can understand broadly which securities are included under different segments identified by the watchdog. Auction is scheduled on every 20th. FII debt limit auction could be held on the next working day in case 20th happens to be a holiday. Auctions would be held on recognized exchanges like BSE and NSE if free limits greater than Rs1000 crore are available for any of the three categories — Government Securities (G-Sec), corporate bonds and long-term infrastructure corporate bonds. One has to bid in premium terms. FIIs have to utilize these limits within 90 days in case of corporate debt and long-term corporate infrastructure debt. The time period for utilizing G-Sec limits is 45 days. FIIs bid in bps as premium to actual yield. When they feel bonds are undervalued they probably bid with higher premium and vice versa. If an FII bid for Gsec at 8bps then that signifies that he/she is willing to buy Gsec (which is currently trading at 7.5%) at 7.42%. These figures are not released by the exchange and are difficult to find on SEBI’s portal. An FII can let the auction limit get lapse but that doesn’t mean that they will be refunded with their bid premium.
Find information on most recent auctions here : BSEINDIA & NSEINDIA
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Budget Expectation – Download Sheet
Appreciate your inputs!!
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