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Uptrend to Continue

Since prices are close to their peak, volatility could be the order of the day

The liquidity driven rally continues largely unabated with benchmark yields close to their historic lows of July this year. While sentiment was largely lackluster with some profit booking at higher levels, bond prices took wings towards close with RBI paying a dividend of Rs 9,350 crore to the exchequer. The booty means that the government's ways and means advances (WMA) balance is now comfortable, thus negating the need for an auction in the near future. The government has been an aggressive borrower in the current fiscal, mopping up over over Rs 75,000 crore in less than five months.

Despite the beginning of the reporting fortnight interspersed with a few holidays, call rates continued to rule steady and moved in a narrow band of 6.9 to 7.10 per cent. The rupee also held its ground around 47.12 to a dollar. The fall in dollar value against most Asian currencies augurs well for the Indian currency, which has lost just 1% since April this year. While the rupee has been rock-solid, most South East Asian currencies have witnessed a perceptible fall against the greenback and impacted India's export-competitiveness.

While industrial growth slumped to 2.1% for the first quarter against 6.1% for the previous year, CMIE has predicted a 4.5% growth for the Index for Industrial Production in the current fiscal. This indicates a sharp pickup in industrial growth for the remaining year. However, demand for non-food credit continues to be slack, a few isolated spurts notwithstanding. For instance, the growth for the fortnight ended July 27 was only Rs 800 crore, way below Rs 3,000 crore in the previous fortnight.

The Cooperative Mess!
The rot in the financial system continues to raise its ugly head. After Madhavpura, there has been a run on Secunderabad-based Krushi Cooperative Urban Bank now. The bank lost over 50% of its deposits in a few days. However, the regulators have again been reactive rather than playing a proactive role. The bank was reportedly on a deposit mobilisation binge, offering an interest of 16.5 per cent! Surely, it is hard to imagine where the bank was putting the gullible depositors' money, except in the stock markets. It is high time the RBI cracked its whip and reined in unscrupulous cooperative banks, which are out to dupe the blind investors. Else, such scams could assume alarming proportions.

Despite ample liquidity, the market is suffering from an auction fatigue and the surplus transfer could provide it a much-needed breather. In the past, there has normally been a gap of 20-22 days between two auctions after dividend payment by RBI. Thus, gilts are expected to continue their northward journey on the back of stable sentiment in the absence of alternative deployment avenues. However, since prices are close to their peak, volatility could be the order of the day.

On the other hand, the Fed is expected to usher in the seventh rate cut of the current calendar on Tuesday. The quantum of the rate cut, though, continues to be hotly debated. The federal-funds futures contract — an indicator of the direction of monetary policy — has fully priced in a quarter-point cut with chances for a higher rate reduction at only 12 per cent. However, with a benign inflation and little recovery, optimists are hoping for a 50 basis points cut. While the RBI has refused to toe Fed's line in the past, sentiment could still perk up in the domestic markets.