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Auction Hit Bonds

With the week's twin OMO auction, the yield on the 10-year GOI touched a high of 7.32% before closing at 7.26% on Friday. Gilt prices are expected to continue their journey skywards as excess funds chase limited supplies of stocks.

The week's two OMO auctions managed to apply initial brakes on the bond price rally. But it was short lived, as the liquidity condition remained comfortable and the bond prices started moving up by mid-week. Consequently, the yield on the 10-year GOI (11.03%, 2012) touched a high of 7.32 per cent on Wednesday before closing at 7.26 per cent on Friday – up 12 basis points over the week.

RBI auctioned three GOI bonds this week from its own portfolio to suck-out excess liquidity in the market. On Monday, it sold Rs 4,240 crore worth of 2005 and 2021 bonds. The lower than expected cut-off price for the 19-year paper pulled down the bond prices. This was followed by another auction of Rs 1,040 crore worth of 2012 bond on Wednesday. The lower yield set on this bond triggered some buying interest and the yields fell across all maturities. The next auction of Rs 6,000 crore worth of 15-year bond is scheduled for Monday, April 15.

Despite these auctions, the market remained highly liquid. This was evident in RBI accepting all the bids for Rs 55,775 crore received during the week at its daily repo auction. The overnight call rates too remained steady in the 6.25-6.50 per cent range throughout the week, as banks were flush with funds. Being the first week of the reporting Friday, the demand was moderate and was matched by sufficient supply.

The rupee remained weak backed by rise in global oil prices and dollar buying by state-run firms. It slipped to an intra-day low of 48.93 to a dollar before closing at Rs 48.89 on Friday, losing 6 paisa over the week. The rupee rebounded on steady dollar inflows from expatriate Indians, exporters and import cancellation receipts. The State-run banks have been pursuing a two-way strategy for quite some time - boosting forex reserve and ensuring a weaker rupee to help the exporters. India's forex reserve rose to 54.56 billion dollars for the week ended April 5, 2002.

In an interesting move, the Board of Trustee of EPF (Employees Provident Fund) has decided to keep the interest rate unchanged at 9.5 per cent. This is in contrast with the softer interest rate stance taken by the Finance Minister in the Budget. And is not sustainable, as the Board cannot assure such a higher return for longer period of time.

On the economy front, the industrial sector is still under the grip of economic slump. According to the quick estimates of IIP released by CSO, the industrial growth slowed to 2.3 per cent in February as against 3 per cent a year ago. Industry contributes a fourth of India's GDP and has been facing problem of excess capacity and lower demand for quite some time.

Outlook
Gilt prices are expected to continue their journey skywards as excess funds chase limited supplies of stocks. We can't rule out another OMO next week. But, the auction would only curb the rally temporarily. Some long-term securities will be in focus ahead of a 15-year bond auction due on Monday. And the auction cut-off will be important for the market, as it will reflect whether the RBI is comfortable with the current low yields or not. The rupee is likely to remain firm next week, with the undertone slightly upbeat due to a fall in global oil prices.