The market continued to function with ample liquidity yet again. On Monday, June 18, the yield on the 10 year benchmark 7.49 per cent GOI 2017 bond fell by 12 basis points. This optimism was primarily due to the absence of a bond auction during the week. However, by mid week the fear of a backlash from the central bank in containing surplus liquidity cast a shadow on such optimism. By the end of the week inter bank call rates dipped yet again to 0.10-0.20 per cent (as of June 22).
Consequently, after Monday's gains, traders turned cautious. While some expected a larger market stabilisation bond issuance, others feared another revision in the cash reserve ratio. The saving grace for the market came from lower than expected inflation figure. Inflation as of June 9 stood at 4.28 per cent, considerably lower than 4.80 per cent reported the week before. The yield on the 10 year benchmark bond finally closed 10 basis points lower than its previous week's close.
Outlook
On Friday, June 22, the central bank announced an auction of Rs 11000 crore for the forthcoming week. This will effectively drain out a large portion of excess liquidity in the system. But fears of a CRR hike are likely to continue as the corpus of the impending auction will be insufficient to drain all the surplus liquidity. Given the uncertainty over the interest rate movements, interest in long dated paper will continue to remain depressed. Bond yields could stage a modest recovery but will be essentially range bound in the absence of any interest rate cues.
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