Up, Up and Away

Ample liquidity and lower inflation did the trick to bring the bond yields down. The annual monetary policy review on April 24 is likely to keep the mood cautious


Relief swamped the market; there was indeed good news from all quarters. There was ample liquidity in the market and inflation finally eased to 5.74 per cent for the week ending March 31, after remaining above 6 per cent for a prolonged phase. Liquidity condition in the system improved substantially with an increase in government spending as well as a suspected intervention by the central bank in the currency market. Consequently, call rates touched a low of 1.75 - 2.25 per cent on Thursday.

Moreover, with the recent inflow of deposits, banks were once again very active in the bond market to meet their SLR requirements.

By Tuesday, April 10, the markets had made good the 16 basis point loss of the past week but these initial gains were lost on account of a higher than expected cut off yield at the Rs 10,000 crore auction on Thursday.

On Friday, news of conversion of recapitalization bonds into tradable bonds was not received well by the market. But fortunately, the lower inflation data was instrumental in capping losses.

Nevertheless, there was a significant 10 basis point recovery from the previous week; with the yield on the 10 year benchmark 8.07 per cent GOI 2017 bond closing at 8.10 per cent on Friday.

Outlook
The annual monetary review, slated for April 24, will keep the market participants cautious over the forthcoming week. The buoyancy in liquidity of the past week is likely to provoke some preventive action from the central bank. While inflation has broken its sticky stance, the estimates of next week will be keenly awaited.

There is likely to be optimism in the market on Monday, April 16, with the announcement of a lower than expected market stabilisation auction for the forthcoming week.

However, the increasing crude oil prices (which have been hovering close to the $70 per barrel levels) have become a cause for concern.

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