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Bonds Poised to Go Nowhere

Sovereign bonds gained marginally. The yield on the 10-year benchmark slipped by 5 basis points to 7.44 percent. Near-term, local factors such as liquidity and the pace of government borrowing will drive the bond market.

Sovereign bonds gained marginally, following the week of profit taking and unfavourable political development. The yield on the 10-year benchmark (11.03%, 2012) slipped by 5 basis points over the week to close at 7.44 per cent. The year-end considerations kept big players – the state-run banks on the sideline.

Call rate was low this week amid good liquidity in the system. After reaching a high of 7 per cent last week, call rates remained firm and touched a low of 6 per cent on Thursday. As banks covered most of its CRR requirement well in advance of the reporting Friday, the demand for overnight fund was on the softer side. Call rate finally closed in a 6.25-6.40 per cent range on Friday. On Wednesday at its weekly auction, the RBI raised the cut-off price of 364-day treasury bills to Rs 94.20 from Rs 94.16. Consequently, the yield at the cut-off price fell to 6.1740 percent from 6.2192 percent.

The rupee turned weaker losing 6 paisa over the week, as state-run banks continued absorbing export-related inflows on behalf of the RBI. Rupee closed at 48.77 to a dollar. RBI seems to be firm that it will not let the rupee appreciate beyond the 48.70 level. The fall in rupee in the recent months has helped Indian exporters in raising their international competitiveness, as the US economy is on its recovery path. The rupee has fallen by 1 percent in the current calendar year, whereas most of the foreign currencies have appreciated.

The inflation has been below 2 per cent for quite some time. It was 1.64 per cent for the week ended March 2, 2002, as against 6.8 per cent a year ago. The low inflation gave RBI enough room to cut bank rate, as real interest rates are still high. And with rate cut in small savings and GOI Relief Bonds by the government, a bank rate cut by RBI looked imminent. But, the RBI governor's recent statement that central bank is not in hurry to cut bank rate is a contrasts to the wide expectation. Lower rate could trigger the needed growth for the sluggish economy. Moreover, the Federal Reserve dropping its long-held recession warning and maintaining its key fund rate could constrain RBI from lowering bank rate.

On the economy front, the core sector has shown signs of revival. According to the data released by the commerce and industry ministry on Friday, the infrastructure sector grew by 4.9 per cent in February, as against a 1 per cent decline in the same month last year. However, the overall growth for the 11-month period is lower than that of the last year. Infrastructure sector accounts for 27 per cent of the Index of Industrial Production and has been sluggish for most of the current financial year.

Outlook
Near-term, local factors such as liquidity and the pace of government borrowing will drive the bond market. The credit policy is to be announced next month. With financial year-end and holidays, bonds are unlikely to witness any big activity.