The bond market continued to waver, looking for some direction in liquidity and interest rates in the near term. Sentiment was jittery on Monday owing to fresh bond supplies. But the real shocker came on Tuesday, when oil prices touched a new high. Fears of inflation gripped market players. At the same time, there was also a broad view that the government would not revise retail fuel prices upwards until state legislature elections are over in December.
By Wednesday there was more bad news. The possible embargo on foreign inflows by the SEBI was not received well by the bond market either. This is because buoyancy in liquidity has been more or less attributed to copious foreign inflows. These inflows have in turn prompted the RBI to release more Rupees in the system in order to support the currency. Hence the possible restriction in issuance of Participatory notes put bond traders on the back foot. Tracking such sentiment, the yield on the 10 year benchmark 7.99 per cent GOI 2017 bond rose to 7.93 per cent, up two basis points from Tuesday's close of 7.91 per cent.
Thursday offered some relief. Tracking developments in US Treasuries, Indian government bonds also rose. Data on weekly jobless claims in the US showed a larger than expected rise. This in turn fuelled the possibility of a US federal rate cut, which is due for revision on October 31. A US federal rate cut will prompt more foreign inflows in to India, thereby ensuring ample liquidity in the system. However, such a change in policy will also prompt the Indian central bank to raise the CRR. However such a move is not likely to be very severe due to the general belief that current liquidity will absorb such a CRR hike comfortably.
Friday was still better for the market with lower than expected inflation at 3.07 per cent for the year ending October 6. This was the lowest annual increase in five years. Which in turn prompted traders to build positions. The yield on the 10 year benchmark bond finally ended at the week at 7.90 per cent, unchanged from its previous week's close.
After market hours the central bank announced a Rs 6000 crore market stabilisation issuance on October 25. This will be followed by a Rs 8000 crore auction of dated paper and a Rs 6500 core sale of treasury bills.
Outlook
As we get closer to the credit policy review scheduled for October 31 both in India and the US, the bond market will remain rife with speculation. As of now a CRR hike looks almost certain and bond prices have more or less taken account of this. So the only surprise will be on the quantum of tightening by the central bank.
Oil prices will be watched closely as well. Plus greater clarity on the participatory note issue is expected on Monday, October 22.
Liquidity could come under threat if the clarification on participatory notes is not favourable to FIIs. This could be further exasperated by the Rs 20500 crore drain through the government's open market operations. On the flipside a CRR hike may not become absolutely necessary if foreign inflows can be contained. In such a scenario bond yields will stage a moderate recovery.
Barring such developments a clear picture will emerge only after October 31. Investors can therefore expect a week market over the forthcoming week.
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