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Bonds on the move

Surfeit of liquidity pushed bonds higher. The market focus is likely to shift towards the short dated securities. But the road ahead will be charted by the central bank's reaction to the prevalent high liquidity.

With a surfeit of liquidity and absence of any negative triggers, government securities gained swiftly almost through the week, to settle for narrow movement towards the end. But the forex market was volatile with the fall of rupee every day through the week, to close at Rs 48.52 against the US dollar. And the rupee also touched a historic low of Rs.48.62 during the week. But it is not a cause of concern given the healthy forex reserves position Rs. 49 billion dollar to protect freely falling rupee. Besides, the growth in reserves continues which grew by Rs. 5524 crore in just 20 through January 18, 2002.

The government bond prices at the medium to long end rallied again by more than one rupee, depressing the yield to a new low. While the 2011 11.50% GOI and 2015 9.85% GOI were the most actively traded in earlier trades, there was visible interest in illiquid securities too towards the end which closed with higher gains. For instance the volumes in the 14-year 11.43% GOI surged from Rs 20 crore to Rs 250 crore this week and registered the maximum gain of Rs 2. But overall, the rally halted in the last trading session as reflected in the average daily volumes. The volumes galloped from last week's Rs 3000 crore to Rs 6600 crore in beginning but finally mellowed to Rs. 6000 crore. At the short end, call rates remained in 6.45-6.50 percent groove for the fourth consecutive week, as abundant funds in system flowed in the repo deals with RBI.

The Federal Reserve in US kept the fed rate at constant 1.75%, giving away signals that that economy is nearing a recovery and the days of lower interest rate may be over. But back home, the fresh economic data remained uninspiring. The aggregate 3rd quarter profits of 514 companies dropped a marginal 0.74 percent against a 39 percent registered in the same quarter of 2000. On the other side, with the current fiscal coming to an end, government seems to be falling short of its promises, but has started making tall targets for the future. While the fiscal deficit at 3.6 percent of GDP is likely to exceed the 4.7 percent target, the national income growth has been once again pegged down from 5.2 percent to a mere 4 percent for the current calendar.

Outlook Government security prices will be guided by the central bank's reaction to the high liquidity and the fresh borrowings from the government to meet its month-end salaries. While the recent rally in gilts was concentrated in the long end of the market, the little interest at the short end has led to the flattening of the yield curve at the short-end of the market. The market focus is likely to shift towards the short dated securities.