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Bonds Get a Knee-jerk

Finally bonds tanked in a volatile week. And they will remain volatile. But things can only get bright, notwithstanding an event risk.

Bonds were volatile through the week tracking political developments following last week's attack on the parliament. The announcement on Friday recalling Indian high commissioner in Pakistan and termination of rail and bus service caused major a dent to bond prices. The benchmark 10-year bond fell by almost two rupees, with the 10 year yield rising up from 8.03% to 8.33%. The medium-term debt and gilt funds shed all gains made in the past week. While the bond fund on an average lost 0.15 percent during the week, the more aggressive gilt funds were down a steep 0.81 per cent.

At the short-end of the market the advance tax payments by corporates continued to drive the overnight call market. But a comfortable liquidity towards end was reflected in the Rs 3225 crore subscription to RBI's repo auctions. Bogged by the shaken banking system of Japan and Argentina's debt defaults, major Asian currencies slumped against US dollar. However, the Indian Rupee was held steady against dollar backed by comfortable foreign exchange reserve and dollar inflows. But towards the end it slipped by 5 paisa on demand from banks.

The Illusory Economic Recovery
Against global economy in recession, the core sectors of Indian economy registered a 3.4 percent growth in November as against 2.2 percent in October. However, fear of slowdown in exports was confirmed with lowering of export target by the commerce ministry. The export target has been drastically cut from 12 per cent to 3 per cent, for the current fiscal. Even the GDP growth estimate of 5.2 per cent of the Ministry of Finance looks optimistic against IMF's projection of 4.4 percent for the current fiscal.

Outlook
Bonds will remain volatile, given the uncertainty of political developments or absence of any. However as the next tranche of 25 basis points CRR cut will be effective by the end of the next week, bonds might stage a modest recovery on the back of enhanced liquidity.