Like with the budget months in the previous years, March turned out to be buzzing with news, speculations and high expectations for the government bond market.
Last month, though, it was also a string of economic-data releases and other events that directed sentiment.
The Union Budget on March 16, the Reserve Bank of India's monetary policy review the day prior, along with announcement of election results in five states, weak GDP and IIP numbers and inflation data put pressure on bonds.
In the first half of the month, economic data releases remained mixed with weak GDP data coupled with better-than-expected data further clouding the outlook on the central bank’s monetary policy course.
On March 15, the central bank chose to stay on the sidelines and wait for the government to reveal its fiscal plans on the Budget day.
Early on, market participants were also skeptical apprehensive about the continuation of bond purchases by the central bank.
So while the RBI did continue with open market operations (OMOs)--buying bonds worth Rs 268.03 billion in three OMOs--and later went on to cut the cash reserve ratio by 75 basis points, bond prices fell amid expectations the central bank will now stop further liquidity infusions.
The poor performance of the Congress--which leads the United Progressive Alliance government at the centre--in several state elections led to questions of stability and whether the government would be able to implement its plans, especially on fiscal matters.
Finally, the Budget turned out to be the final dampener as the government announced borrowing of Rs 4.79 trillion (bringing gross market borrowing to Rs 5.69 trillion), which led to hardening of yields.
Post that, bond prices continued to remain under pressure as the market awaited a deluge of securities, as part of the government’s big borrowing programme.
Yields touched a near four-month high in March. While the yields on government bonds fell at the shorter-end of the yield curve, it rose sharply at the longer-end.
The 10-year benchmark bond was the worst hit with its yield surging by 37 bps during the month to end at 8.63% on March 30, 2012 from 8.20% on February 29, 2012.