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No Signal of a Rate Cut

With no signal of a rate cut from RBI, bond markets moved on a cautious path. Read further to get a note of what drived the markets this week……

The runaway rally has finally ebbed in the absence of any immediate triggers to buoy sentiment. While prices have remained range bound, players continue to focus on short-term papers with little appetite for longer-dated bonds. This amply reflects the current mood of caution on the Bond Street with trading concentrated below 10-year bracket. The highlights for the week were an appreciating rupee, steady call rates and buying frenzy for corporate bonds. The dollar remittances from exporters lifted the rupee by 3 paise to 47.12. In another sign of global slowdown, the first quarter of the current fiscal saw a paltry growth of 1.76% in exports compared to 28% last year.

Despite the beginning of the reporting fortnight, the inflows on account of coupon payments and redemption softened call rates. After crossing 9% last week, overnight call remained stable and ended in the 6.70-6.90% range. The surplus liquidity saw players actively bid for the RBI-conducted repo auctions and parked Rs 16,930 crore with the central bank at 6.5%. Flush with funds, institutional players also hooked on to the corporate bonds. The aggressive buying narrowed the yield spread between a 5-year corporate paper and sovereign bond to 120 basis points from a high of 138-140 basis points in July.

Tough Times Ahead?
The banking industry could be heading for tough times with little credit offtake and unabated growth in bank deposits. For instance, till July 13, bank deposits had surged by Rs 53,00 crore from the last reporting Friday of March 2001. With investor confidence shaken in equity markets and public sector investment managers, bank deposits are the only alternative. But, it's a double whammy for banks. In the absence of alternative deployment avenues, the sector has been heavily investing in gilts. However, with yields nudging down, banks run the risk of asset-liability mismatch due to higher deposit rates and lower accruals on investments. On the other hand, the slackening bond rally and stabilisation of yields at current levels means lower trading profits, which could impact the bottomline in the current fiscal. Worse, any hardening of interest rates would mean sharp mark-to-market losses.

Outlook
Call rates are likely to remain stable with most players covering their positions before the reporting Friday. With ample liquidity in the system, another auction could be on the cards. Further, buying is expected to continue in corporate bonds as market players pick up yield. The current spread of around 120 basis points is still attractive. The interest rate outlook looks stable with ample liquidity and the continuing economic slowdown. While there have been some stray instances of offtake in non-food credit, it does not point towards a sustained trend.

The central bank has so far completed 60% of the gross budgeted borrowing of Rs 118,852 crore. While the government is likely to overshoot the target, the quantum could guide sentiment in the markets. Apart from the fall in tax collections, the government is grappling with the bailout of public sector financial institutions. The week saw Rs 1,000 crore-bailout package for the beleaguered IFCI. If the government continues to blow up crores in rescuing errant institutions, it will have meagre resources for pump-priming the economy.