Over Monday and Tuesday yields remained sticky owing to speculation on the US Federal Reserve's possible rate cut. While yields had taken into account a possible 25 basis points cut, the final verdict on Wednesday of a higher 50 basis point cut was a pleasant surprise for market participants.
The US Federal Reserve lowered its federal funds target rate by 50 basis points to 4.75, it also cut the discount rate it charges for direct loans to banks by the same amount to 5.25 percent. Consequently, the yield on the10 year benchmark 7.99 per cent GOI 2017 bond fell five basis points on Wednesday.
But high oil prices and tight liquidity conditions put a damper on market sentiment. With crude breaching the $ 80 per barrel barrier a possible retail fuel price hike put traders on the back foot. At the same time the outflow on account of advance corporate tax payments pinched liquidity with call rates zooming to 7-7.20 per cent from the previous week's low of 4-4.25 per cent. But this pinch is only a temporary phenomenon with the money re-entering the system through government spending.
Persistently declining inflation numbers kept sentiment upbeat on Friday. Inflation hit a new low yet again at 3.32 per cent for the week ending September 8, down from previous week's 3.52 per cent. The yield on the 10 year benchmark 7.99 per cent GOI 2017 bond finally settled four basis points lower than its previous week's close.
After market hours, the central bank announced a Rs 10000 crore sale of market stabilisation scheme (MSS) bonds and another Rs 6500 crore of treasury bills on September 26.
Outlook
Market participants are already expecting a downward revision of the RBI's key rates. The US rate cut has translated into money chasing higher interest rate markets. As a result of an increase in such inflows the Rupee has appreciated beyond Rs 40. This has sparked off speculation of the central bank lowering its benchmark rate.
If the government decides to stem this appreciation and or reduce its key rates, we will be faced with more liquidity in the system. This could potentially derail the current fall in inflation. In case of status quo from the government, markets will remain range bound over the near term. Yields are likely to increase on Monday, September 24 owing to the Rs 16500 crore announced on Friday, September 21.
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