Little Action on Bond Street

Bond markets witnessed little action for yet another week. Liquidity concerns kept the market participants away, as the trading volumes remained thin throughout the week


Bond markets witnessed little action for yet another week. Liquidity concerns kept the market participants away, as the trading volumes remained thin throughout the week. The yield on the benchmark 7.38 per cent GOI 2015 bond remained flat for a major part of the week before shedding one basis point towards the end to close at 7.11 per cent. The State Bank of India redeemed India Millennium Deposits worth Rs 33,000 crore on December 29, 2005. The redemption went smoothly.

Earlier in the week, bonds recorded marginal gains on the back of a decline in the US treasury yields and softer crude oil prices. However, concerns over the redemption of IMD kept the gains under check. The situation remained quite similar throughout the week and the bonds traded in a narrow range. However, the traders expect the liquidity to improve in the coming days owing to higher government spending and the funds that went out earlier in the form of tax payments returning back to the system. Apart from that, interest payments on a Special Deposit Scheme estimated at Rs 10,000 crore will also ease the pressure on liquidity in the coming month.

Inflation rose marginally to 4.62 per cent during the 12-month period ending December 17, 2005, as against previous week's 4.5 per cent. Although this was lower than the expectations, but it failed to have any significant impact on the markets. An increase in the prices of fuel and non-food items contributed to the rise.

Rupee witnessed some volatility before ending stronger at 45.07 per US dollar by the end of the week. After appreciating on Monday, rupee eased the next day on the back of higher month-end dollar demand by the companies. But subsequently, robust FII inflows continued to perk the rupee up as it gathered strength over the remaining part of the week.

Call rates rose sharply over the week amid tight liquidity conditions to end at 6.95-7.05 per cent. They touched a high of 7.15-7.25 per cent on Thursday, before declining marginally on Friday. The RBI Governor Y.V. Reddy stated that the call rates presently should be viewed in context of the redemption of the India Millennium Deposit.

Outlook
With the liquidity expected to improve from here on, the bond markets may recover in the coming week. However, the traders will also keep an eye on any announcement regarding the forthcoming twin auction of government securities worth Rs 10,000 crore scheduled to be held between January 3-11, 2006.

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