Foggy Markets

Uncertainty continues to rule the debt market. While a CRR hike is expected by most, all attention is directed to the forthcoming credit policy review which is likely to clear this ambiguity


On Monday, the bond market's reaction to fresh supplies of bonds announced on Friday, October 5 (after market hours) was adverse. Fears of demand drying up ruled the market. But as the week progressed, adequate liquidity in the market saw traders lap up these fresh supplies. The high cut offs also helped in pulling investors at the three scheduled auctions during the week. All this was again possible with FII's pumping in money in the debt market as well. Over the past week FIIs have pumped in a significant Rs 1769 crore (net of sale) in the debt market alone. FIIs were seen borrowing from the overseas market paying Libor rates and investing in Indian debt market, thereby making a neat spread. As a result of a wary market on Monday, October 8, the yield on the 10 year benchmark 7.99 per cent GOI 2017 bond rose to close at 7.93 per cent as against its previous close of 7.90 per cent. Tuesday was a tad better, with ample liquidity allaying fears of drying up demand. Wednesday and Thursday witnessed a marked improvement in sentiment, and the yield of the benchmark bond fell to 7.89 per cent by end of day, Thursday.

However, strong industrial growth data released on Friday pushed yields up yet again. The robust one year industrial output growth of 10.7 per cent as of August was much higher than the 7.5 per cent growth witnessed in July. This in turn made a much debated CRR hike a certainty. Lower inflation data for the year ending September 29 at 3.26 per cent did offer some recourse. However, the yield on the benchmark bond still rose to end at 7.90 per cent on Friday.

After market hours, the central bank announced a Rs 10000 crore auction of market stabilisation scheme bonds scheduled for October 18.

Outlook
All eyes are now set at the RBI's policy review meeting scheduled for October 31. After the industrial output numbers were released on Friday, a CRR hike even before October 31 seems very possible. Traders will therefore avoid taking large positions. The market will also look at the developments in US treasuries for cues on the credit policy review scheduled for October 31, both in India and the US. If the US Fed Reserve decides to maintain a status quo on its key rates then liquidity may ease off a bit but a rate cut may force the RBI to take severe monetary tightening steps. In the near term the outlook for the debt market continues to look gloomy.


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