Traders did not expect much from the market. With the Cash Reserve Ratio (CRR) hike taking effect on November 16, a tightening of liquidity was in the offing. As a result, the week did not hold much promise. However, the past week turned out to be a boon for the government bond market. For one, the RBI provided significant support by infusing money into the system and this forestalled a severe crunch in liquidity. While call rates came under pressure, by the end of the week they had stabilized to 7.75 - 8 per cent.
The impetus for the rally came on Monday, November 12, when industrial output numbers put up a dismal show. Industrial output grew 6.4 per cent in September from a year earlier. Such a slowdown was received well, as it would pressurize the central bank to re-look its strict monetary policy measures. A possible cut in key lending rates would be the direct effect. As a result of these two factors, the yield on the 10- year benchmark bond fell consistently till Thursday. On Thursday fears of rising oil prices again took hold of sentiment and the yield on the benchmark bond rose marginally. However, by Friday the benchmark bond had recovered losses of the previous day, on the hopes that cash would be less tight over the forthcoming week. Sentiment was also aided by a significant fall in the yields of US treasuries, which fell on the back of rising concerns over the sub-prime crisis. However, higher than expected inflation at 3.11 per cent as of November 3 capped gains on Friday.
The markets have entered a phase where interest rates will be kept steady in the near term. With artificially low inflation (due to the artificially low domestic oil price), the RBI is unlikely to take any decision on its key lending rates.
Liquidity is expected to stabilize next week. Also, so far the central bank has not announced an MSS auction to sterilize its intervention in the currency market. However, the central bank might announce fresh supplies on Monday. According to its tentative borrowing calendar an issuance of Rs 7000 crore is scheduled between November 16 and November 23. The absence of fresh supplies will be received well by the market.