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Bull Fervor Grips Bond Street

The benchmark 10 year touched yet another low this time, despite RBI's efforts to strain out excessive liquidity. And with expectation of another round of open market sales, the sentiment may turn cautious from an upbeat mood

The bond markets registered sharp gains, as sovereign yield continued its southward movement in the sixth consecutive week, despite RBI open market operations. The 10-year benchmark GOI paper touched a new low of 7.84 percent during the week. The liquidity in the market was boosted by coupon and redemption inflows in the system. While central bank maintained its comfortable stance when the yield fell below 9% last week, this time it stepped in to garner Rs 6500 crore through papers of varying maturity. Notwithstanding the full subscription to the auction, the gilt prices gained by 25-50 paise reflecting abundant liquidity.

The buoyant forex reserves, stable oil prices and unwinding of long-term positions ahead of a holiday helped the Indian currency hold steady against the US dollar. Despite it being the reporting Friday, when banks run up for cash to report their reserve requirements, the call rates ruled steady. And as the players covered up their requirements much ahead of the deadline, call rates was below the repo yield of 6.50 percent mid week.

The steady fall in the oil prices since the US attacks is welcome news for Indian economy, as it lowers the projected oil import outlay by 17 percent. On the other hand finance minister demanded additional funds to the tune of Rs. 3396 crore to induce demand and infrastructure reforms even at the cost of going overboard on its fiscal deficit target.

The bond market remains upbeat since October 22 and the medium and long-term gilt funds have been the key beneficiary – up 4.96 percent in November, twice as much as they gained after last rate cut in February 2001. However, these tempting returns cannot guide new investments.

Outlook
The bond market remains strong and should remain so, notwithstanding central bank's open market operations. As this looks likely, the market should gain stability around current levels. Because high liquidity prevails with the money infused through CRR rate cut and growing deposit of banks and select demand for government paper from ICICI to meet SLR requirements.