The much awaited rally in the government bond market that surfaced in the first week of the New Year kept up the pace over the past week as well. Through the week sentiment was upbeat with traders expecting interest rates to soften. The speculation on a possible rate cut gained momentum when on January 4 the finance minister asked banks to lower their rates by 50 basis points. Even a status quo on interest rates in the upcoming RBI policy review on January 29 would be good enough to keep sentiment upbeat. At the same time many traders are hopeful of a rate cut on January 29.
Furthermore the ease up in liquidity condition that was witnessed in the first week of January led to a jump in trading volumes. Therefore, unlike the recent past when the US Federal Reserve announced a rate cut, a liquidity crunch did not exasperate the positive sentiment and this translated into a robust rise of bond prices.
The yield on the 10 year benchmark 7.99 per cent GOI 2017 bond continued its southward movement through the week. However on Friday, data on the central bank's market operations revealed that so far in January the RBI has been a net seller. Fearing fresh supplies, bond prices corrected. Yet as the day progressed prices bounced back. The yield on the 10 year benchmark bond finally closed at 7.53 per cent, falling by an impressive 22 basis points through the week. While the yield was not effected much by the disappointing industrial output numbers, this possible slow down in Industrial output could push the RBI to reduce rates sooner.
Inflation was reported at 3.5 per cent, unchanged from the previous week.
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Outlook
After market hours the central bank announced a Rs 4000 crore auction under the market stabilisation scheme. This will lead to a jittery start on Monday. However with comfortable liquidity in place, buying momentum will build up at every dip, thereby keeping yields in check from rising too much.
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