The Indian bond market investors remained bullish during the month of February. The investors were more focused on the Union Budget announcements rather than the global cues of sequester and Italy election results. The momentum of RBI’s rate cut during January helped the debt markets start the month of February on a positive note. The economic data released during the month did not show any signs of growth recovery in India. Expectations were high on some measures from the government to improve the situation. These expectations helped the bond market rally. The IIP numbers and Inflation has set expectation high on rate cut by RBI. The Industrial production contracted during the month of January 2013 compared to December 2012. The comparatively lower inflation rates added to the market upbeat. Inflation was one of the major concerns which were holding back RBI from announcing further rate cuts. The Industrial Production contraction meant that, the industrial sector needed fresh cash inflows to boost their supply. The expectations were high on rate cut measures by RBI in its March meeting to support industrial growth because of lower core inflation numbers.
The weak GDP forecast numbers for fourth quarter of current financial year also spurred fresh bond buying by investors. Cancellation of Gsec auction and reduced market borrowing for the current financial year boosted market sentiments. In order to increase the liquidity in market, RBI has bought bonds in an Open Market Operation. However, the government bond yields increased sharply during the last day of the month after budget announcements. Expectations were high on budget to announce measures to boost FIIs in domestic bonds. But no significant announcements were made on this front. Added to this, the government higher than expected market borrowing also was not in tune with debt market expectations. The activity in debt markets both in Mutual funds and FII’s is shown in Figure 3. The graph shows how debt markets are being favored by mutual funds during the last year. In the days ahead the movement of the debt markets is largely dependent on the RBI’s policy review. The IIP numbers and Inflation numbers to be announced in March are going to play a critical role in RBI’s decision making process. If we see the rate cuts coming in March, expect bond funds to provide good returns.