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Liquidity Causes Anxiety

Liquidity worries caused the yields to surge initially, but they eased off later as the concerns subsided. The yield on GOI 2017 8.07% bond ended the week at 8.16%

Bond markets witnessed selling during the week ended June 15, 2007. The phenomenon was not restricted to the Indian markets and even the US Treasury yields surged. In the domestic markets, the benchmark GOI 2017 8.07% bond rose steeply in the initial part of the week but eased subsequently to end at 8.16%, up two basis points from last week's close.

What caused the initial panic was a series of bond auctions (totalling up to Rs 22,000 crore) that the central bank had lined up for the week. These included the auctions of treasury bills worth Rs 5,000 crore and Rs 6,000 crore on Monday and Wednesday, respectively. Also scheduled were the auctions of GOI 2017 7.49% bonds worth Rs 5,000 crore and Rs 6,000 crore on Tuesday and Friday, respectively.

Apart from that, the expected quarterly tax outflows of Rs 20,000 crore during the week also weighed upon the sentiments.

The impact of all this was visible on the first day of the week itself, when the yield on the 10-year benchmark bond shot up by 9 basis points to 8.23%. The situation was no different on the next two days, as the yields continued to rise. A higher-than-expected growth rate of the industrial production (13.6%) achieved by the economy further dampened the spirits, as the traders feared further tightening of interest rates.

However, conditions eased on Thursday and Friday, as the impact of cash outflows did not turn out to be as drastic as was expected, and the liquidity remained adequate. A decline in inflation (for the seventh week in a row) also brought some respite to the markets. For the 12-month period ending June 2, 2007, inflation stood at 4.8%, down from last week's 4.85%. The decline has mainly been attributed to a reduction in the prices of food articles and some manufactured goods.