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Sharp Rally

Uncertainty in the bond markets eased temporarily on the back of declining inflation. The yield on the 10 year benchmark 7.49 per cent GOI 2017 bond fell 20 basis points over the over

Bond prices rallied on the back of increasing confidence among traders that an interest rate hike is no where on the anvil. The central bank's seemingly comfortable stance on the current liquidity in the market combined with declining inflation prompted traders to add to their existing positions. By mid week, trading volumes had increased significantly.

Call rates continued to remain depressed and were in the 0.20-1.75 per cent range through the week. Typically, traders borrow funds in the unsecured cash market to fund bond purchases. With call rates dipping to these levels after the 6-6.25 per cent range the week before, traders bought bonds to exploit this interest rate differential.

The only dampener during the week was higher than expected inflation at 4.13 per cent for the week ending June 23.

Outlook
The higher than expected inflation figure on Friday will turn down the heat on this bull frenzy. While the past week saw a significant rally, traders are likely to tread with caution given the impending policy review on July 31. Fears of an interest rate hike have more or less been squashed owing to the favourable inflation outlook, as well as interim reports that suggest a slow down in loan growth. However, the comfortable liquidity situation is at odds with the central banks stance on a tight monetary policy. As a result there is likely to be a policy review on mopping up such liquidity.