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Bonds turn Lazy

Bonds went nowhere. But will witness action for General's speech, Indian reaction and the results of Rs. 5000 crore auction early next week. But key variable's still point to a range bound week ahead.

Bond ruled steady during the week to face profit booking from cautious players at the short-to-medium end of the market. Though the long-term government securities attracted buying interest. Reserve Bank announced auction of Rs 5000 crore 15-year bond fueling a brief rally, being lower than market's expectation. Dealing in the 9.85%15-year GOI was at 8.10% down from last week's 8.14%. The yield on the 10-year 11.05% GOI moved closer to 8 percent levels on the Army chief's critical comments. With this auction the government crosses its budgeted borrowing target of Rs 1.18 lakh this fiscal.

The corporate debt segment was lackluster with falling volumes, tracking the movement in the government securities. Short-term papers (debentures/bonds/CPs) were in demand from mutual funds flush with strong inflows in their cash funds in December. With easy liquidity, call rates slipped below the RBI refinance (repo) rates of 6.50 percent and the lenders placed Rs 47250 crore with RBI in daily repo auctions. But the forex market witnessed a discerning trend as the sustained state bank dollar purchases saw the rupee slipping by 0.3 percent against the dollar. Market participants anticipate RBIs intervention through the banks, as the rupee is still overvalued to its trade-weighted value and the major Asian currencies have devalued against dollar in recent times.

Government in Borrowing Frenzy In its bid to bridge non-tax revenues -- down 3.75% against last year's collection, government increased excise duty without any cap. And was quick to raise the excise duty on petroleum products which would generate Rs. 2000 crore. On the other hand, it slashed retail prices of petrol and diesel. The additional mobilization through duty hike will raise the deficit in oil pool account for which government will compensate the Oil companies through issue of Oil bonds carrying 7% coupon, once the APM is dismantled. But the margins of Oil majors are expected to come under pressure as the coupon payment hardly compensates for a borrowing cost in range of 11%.

The government resorting to ad-hoc means of boosting revenues gives a clear indication of its finances going haywire and will once again give an excuse of global recession for not being able to meet the budgeted targets.

Outlook
Government bond market will seek guidance from the politics of Pakistani General speech, the Indian reaction and results of auction. The Rs. 5000 crore Government bond auction early next week is unlikely to squeeze liquidity. But the fear of a likely OMO may halt any sharp rally. Broadly key variable's point to a range bound week ahead.