In March, some key positive developments were counter-acted by some negative macro-events. On the positive side, India?s headline inflation and growth at a 3 year low allowed RBI to focus on growth and cut the Repo rate by 25bps to 7.50%. The February trade deficit narrowed significantly to US$14.9 billion from US$20.0 billion earlier which had a positive impact on Indian rupee. However the strength could not sustain as the Cyprus ?bail-in? lead to a risk-aversion rally in USD. Domestic news flow added fuel to fire, as political manoeuvring by regional political parties led to apprehensions of an early general election.

Soon after, RBI pointed out to risks from a current account deficit, the Finance Minister announced further measures to attract foreign fund flows by making it easier for investors to access the local debt markets. It announced removing the multiple sub-categories of debt quotas and merged them into two broad categories for purchasing ?Government? and ?Corporate Debt?.

Towards the month end the liquidity situation was stretched further on account of advance tax outflows and high cash balances maintained by the Government with the RBI. Bonds remained under pressure even as RBI announced injecting liquidity through Open Market Operations.

India?s current account deficit increased 6.7% of GDP in 3QFY13, slightly higher than market expectations as imports grew faster than exports. Strong capital flows of $31.8 billion in the same quarter, partially bridged the current account gap.

Outlook:

Post RBI?s hawkish statement, the market has taken a more cautious outlook on further expectations of rate cut. UTI expect some softening of yields in April on account of an improvement in system liquidity as government spending flows back into the system and RBI continues to manage liquidity through OMOs. However, retail inflation cooling-off is essential for a sustained improvement in bond prices. Although RBI?s stance will remain supportive of growth, further rate actions will primarily depend on retail inflation and government policy measures at managing the twin deficits.

Renewed concerns from the Euro zone resulted in higher currency volatility leading to an expansion in INR forward premium. However, unless there is a full-blown contagion, it will be the domestic reform measures and economic print that will decide whether the INR breaches the 52-56 range.

Key Concerns:

UTI point out that India?s reliance on capital inflows to bridge the Current account gap is likely to stay high in the next fiscal year as well. This is likely to keep markets vulnerable to external financing concerns. In addition, the political situation is volatile