Bonds reacted positively this week with a series of positive pointers -- RBI's comment that the government's borrowings will marginally exceed the targets, likely reduction in cash reserve ratio to 3 percent and promise of positive moves by Pakistan's President. Gilt prices gained by one rupee at the medium to long end of the curve. While the 15-year maturity government securities were the most actively traded throughout the week, the rally at the medium end caught momentum towards end.
A lower than expected yield on the Rs 5000 crore 15-year bond auction held on Monday coupled with emerging consensus of continues softening of interest rate stance triggered hectic buying in corporate bonds by the domestic funds. But the 5-year corporate debt yield treaded in the 8.74-8.75 percent range. With the spread over similar maturity government security remained constant at 150 basis points. The rally in gilt yields has yet to permeate down to corporate bonds.
With Pakistan's President speech reducing the possibility of war, the dollar unwinding by state run banks and inward remittances bolstered the domestic currency by 0.3 percent, contrary to the similar magnitude of losses in the last week. The rupee held ground at Rs 48.25 level against the dollar. The ample availability of funds in the market ensured the call rates moved around the repo rates of 6.50 percent.
A sequential month-over-month growth in the manufacturing index from 2.2% in October to 3.4% in November and 4.2 percent in December has reflected India' resilience to global recession. Still the national income growth estimates have been revised down. But contrary to the government's game plan of pump priming the sagging economy at the cost of fiscal deficit, the central bank warned such move is unlikely to yield desired results. The central bank suggested pursuing a soft monetary policy measures in the short-run to pep up the inflation, which at its low has resulted in the loss of output. In its view, the pump priming measures i.e. additional government expenditure at the cost of high fiscal deficit is not warranted and rather government should prioritize its spending avenues within its limits.
The RBI has clearly indicated its intent for an easy monetary policy. This coupled with easy liquidity and receding war fears will boost bond values. But the fear of a likely open market operation as in the past may halt any sharp rally.