It was an action packed week for the bond market. The week started on a strong, with traders were optimistic about a US rate cut. Data released last Friday, September 7, showing that US companies had cut 4000 jobs- the first fall in four years. This development has made a rate cut almost certain. On Monday the yield on the 10 year benchmark 7.99 per cent GOI 2017 bond fell to 7.83 per cent from its previous close of 7.88 per cent.
However, back home liquidity worries threatened this sentiment. With advance tax payments of close to Rs 35000 crore traders were almost certain of a squeeze in liquidity. Moreover firming oil prices did not help matters and on Tuesday the previous day's gains were wiped out with the yield on the benchmark bond rising to 7.87 per cent.
However by the end of the week these concerns proved to be unfounded, with call rates dipping to 3 - 4 per cent from Monday's 6.10 - 6.15 per cent. But the icing on the cake was the discernible slow down in industrial production. This in turn reiterated the growing belief that the central bank may in fact be done with its tightening monetary policy. Furthermore the consistent slide in inflation too helped matters. Inflation was down to 3.52 per cent for the week ending September 1 as against the previous week's 3.79 per cent. All these positives managed to lift sentiment but traders shied away from taking large positions. The yield on the benchmark bond finally closed at 7.86 per cent, two basis points below the last week's close.
Outlook
All eyes are now directed to the September 18 policy review of the US Federal Reserve. With a strong pull to cut interest rates the Federal Reserve's action is keenly awaited. This in turn will put pressure on the RBI to revisit its hawkish monetary policy and ease rates. While bond prices have taken this development into account, a final verdict is sure to be received well by the market. Liquidity in the domestic market looks buoyant with latest data showing that the central bank has kept up its dollar purchases to support the rupee. This in turn injects more rupees in to the system and eases liquidity. Investors can gear up for a favourable week in the bond market.
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