LAF borrowing shores up to INR 1.3trn; RBI’s policy stance eyed

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LAF borrowing shores up to INR 1.3trn; RBI’s policy stance eyed
Government securities
 Government bonds traded in the narrow range today ahead of policy review on
Thursday. RBI is likely to raise repo and reverse repo rates by 25bps each despite
some moderation in industrial production and slowdown in investment growth as
inflation is the central bank’s dominant concern. WPI inflation has remained at
elevated levels and significantly higher than the central bank target of 7% for FY11
and a bigger concern is the shift in the drivers of inflation from food articles to
non-food manufacturing articles.

Non-SLR market
 Supply of CDs remained strong as banks sought to raise funds ahead of the policy
review on expectation that short terms rates could rise further post the increase in
policy rates. Three month CDs were dealt at 9.80%-9.85% while one year CDs
were dealt at 9.95%-10.00%. UCO Bank & IOB placed INR 4bn & INR 10bn of
three month CD at 9.88%. Central Bank also mopped up INR 14.50bn through
three month issuance between 9.86% - 9.90%.
Money markets
 LAF borrowing increased to INR1.33trn compared to INR 1.17trn on Tuesday
mainly on account of the outflow of advance taxes and skewed borrowing from
banks to cover for their CRR requirement. With an expectation of an increase in
the cost of borrowing at the LAF by 25bps, banks have borrowed heavily at the
LAF window to meet the reserve requirement for the fortnight.