Home Trade-co-operative banks nexus took the trip of g-secs this week. Gilts bled heavily. The yield on the 10-year benchmark (11.03%, 2012) closed at 7.66% on Friday – up 15 basis point. Initially, the bond prices rose on the expectation that inflows from bond and treasury bill redemption and coupon payments will increase liquidity. Consequently, the yield fell to 7.43% mid-week. But profit booking, a Rs 6,000-crore auction scheduled for Monday, and the widening of the gilts scam landscape --- the latest victim is the Seamen's PF scheme managed by the shipping ministry, which announced it had lost Rs 92 crore – the market sentiment remained negative for the rest of the week.
Although the current scam is not a patch on the famous 1992 securities scam, nevertheless it has again managed to hurt investor confidence. Clearly, this means that RBI has been lenient in providing sufficient check systems as scams continue to raise their ugly heads every now and then. Just when people were beginning to heal from last year's Ketan Parikh-driven scam, gilts racket surfaced to dampen their spirits. The solution: fully dematerialised trading could go a long way in providing a check since it will eliminate the danger of loss in the delivery of physical papers.
Enough of scams, let's move to money markets. Call rates remained high in the 6.50-6.90% range, mainly on account of expectations of tightened liquidity next week due to scheduled gilts auction. That apart, many banks reduced exposure to call money following the credit policy announcement, thus, affecting liquidity, which led to call rates moving up. However, the liquidity condition improved with inflows of Rs 3,640 crore from interest payments and redemption of 12.69% 2002 bond and a 91-day Treasury bill. Call rates finally closed at 6.75-6.90% on Friday.
On the rupee front, it touched a new closing low of Rs 49/$ on Friday backed by heavy corporate demand. The currency, in the current calendar, has become weaker by 75 paisa till date. India's foreign exchange reserves have touched Rs 55.62 billion for the week-ended May 3, 2002, sufficient to take care of over 11 months of import bill.
As for the economy, the slowdown continues to gain momentum with a sharper-than-expected fall in industrial growth. The Index of Industrial Production dipped to 2.7% in 2001-02, compared to 5% in 2000-01. Much of the slowdown is attributed to the manufacturing sector, which accounts for 80% of the total index. Also, industrial sector accounts for 1/4th of India's GDP and has been in the doldrums due to excess capacity and lack of demand.
Outlook
The RBI will auction 8-year and 20-year government bonds worth Rs 6,000 crore on Monday. Since bond auction typically has a negative impact on prices due to the liquidity effect, the bond prices may take a dip initially but should recover by Friday. Overall, a range-bound week ahead.
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