On Monday the mood in the bond market changed colours. Traders did not welcome fresh supplies with the return of auctions under the market stabilisation scheme (MSS) in nearly two months. The yield on the 10-year benchmark 7.99 per cent GOI 2017 bond rose by two basis points. On Tuesday, ample liquidity helped in boosting sentiment; consequently the yield on the benchmark bond fell by two basis points. By Wednesday, the fear of a fuel price hike and the consequent increase in inflation gripped the market and the benchmark yield rose by one basis point. Thursday brought with it more jitters with the scheduled meeting for fuel price hike. But lower than expected cut offs at the bond auction under MSS boosted sentiment. Further no decision on fuel prices was reached. Consequently, the yield on the benchmark bond rose by two basis points.
On Friday the craze behind the Reliance Power IPO hit cash supplies severely, as a result call rates zoomed to 60 per cent. The RBI intervened, pumping money into the system after which cash condition stabilized and the call rate ended at 7.75-8 per cent. Sentiment was also hit by higher inflation reported at 3.79 per cent for the year ended January 5 as against the previous week's 3.5 per cent.
All in all it was a range bound week, with the yield on the 10 year benchmark bond rising 1 basis point from its previous week's close.
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Outlook
Increase in fuel prices looks inevitable. With the fallout of such an increase on inflation, softening of interest rates will be deferred. Hence, the recent rally will be stopped in its tracks. Investors can expect jittery sentiment through next week on this count and a consequent rise in yields.
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