The confidence in the bond market over the past week was truly enviable. The driving force behind this optimism was the ample liquidity condition in the market. In spite of a Rs 18000 crore mop up by the central bank during the week, liquidity in the market remained buoyant. Call rates remained below 0.50 per cent through the week.
The result was a 13 basis point fall in the 7.49 per cent GOI 2017 bond yield. There was a slight slowdown on Thursday with traders resorting to profit booking ahead of a large bond auction and release of inflation data. Adding to the jitters was the finance minister's comment on Thursday that left no ambiguity on the government's intention of maintaining strict monetary controls on the economy.
However by Friday the mood changed yet again. The bond market bounced back with reported inflation remaining unchanged at 4.27 per cent. The yield on 10 year benchmark bond finally settled at 7.81 per cent for the week ending July 20.
Outlook
The rising oil prices pose a big threat to the central bank's struggle to control inflationary pressures. With crude touching $ 80 per barrel levels, an increase in oil prices looks very likely. As a result a downward revision of interest rates in the near term can be ruled out. Traders are likely to take a cautionary stance, just in case of any surprise moves by the central bank, ahead of the monetary review at the end of the month. Another veiled threat could emerge from possible profit booking in the stock markets and the consequent outflow due to FII's which can reduce the cash surpluses in the system.
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