Liquidity Crunch in Bond Markets

Bond markets remained lacklustre for the second consecutive week as liquidity concerns kept the market participants from taking huge positions


Bond markets remained lacklustre for the second consecutive week as liquidity concerns kept the market participants from taking huge positions. This was also reflected in the trading volumes, which remained quite low throughout the week. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.12 per cent, up two basis points from its previous week's close of 7.10 per cent.

Bond markets started off the week on a negative note as the yields inched up. Tight liquidity conditions on the back of quarterly tax outflows continued to worry the traders. Moreover, the forthcoming redemption of India Millennium Deposit worth Rs 33,000 crore scheduled for December 29, 2005 by The Sate Bank of India has triggered the expectations of further worsening of the liquidity position. The yields maintained an upward bias for majority part of the week. The yield on the popularly traded 7.38 per cent GOI 2015 bond touched its weekly high of 7.13 per cent on December 22, 2005. Some traders, though, hope that there may be some respite on the liquidity front as the money going out of the system by way of tax flows may return as a result of government spending. Friday brought some respite to the markets as the bonds ended in the positive territory, on the back of lower than expected inflation, coupled with a surge in the US treasuries.

Inflation remained benign. For the 12-month period ending December 10, 2005, inflation stood at 4.50 per cent, slightly lower than previous week's 4.55 per cent. A drop in the prices of food and non-food items contributed to the decline.

Rupee started off on a high note, building upon the momentum it had gathered in the previous week to touch its two month high of 45.03 per US dollar. However, the Indian currency lost ground mid-way during the week as the dollar posted gains against other currencies. But robust FII inflows in the domestic stock markets propped the rupee up towards the end of the week when it closed at 45.16 per US dollar.

Call rates remained volatile during the week. Dwindling liquidity saw them touch their weekly high of 6.30-6.40 per cent on Wednesday. However, lower demand for funds eased them off a bit before they finally ended at 5.80-6 per cent.

Outlook
Bond markets are expected to remain dull at the start of the next week as the traders would anxiously gauge the impact of the redemption of India Millennium Deposit on the liquidity conditions. But the markets may pick up subsequently, once the liquidity starts to improve on the back of government spending.

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