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Bonds Undersiege

Bonds tumbled as terrorist attack in Jammu took centerstage hurting investor sentiment. The benchmark 10-year bond fell by Rs 2.50 over the week to yield 7.94%. Movement in bond prices will primarily be determined by developments on the border.

Just when markets were beginning to put the gilt scam behind them, terrorists struck in Jammu, killing not just ordinary mortals but the market sentiment as well. The BSE Sensex shed 97 points from the previous week's levels while Nifty lost 25 points. The news of blast in Srinagar on Friday further added to the nervousness, taking the stock market, and bond prices too, in its grip. The benchmark 10-year bond (11.03%, 2012) fell by Rs 2.50 over the week, with yields soaring up from 7.66% to 7.94%. The current yield is at a four-month high, much higher than the 7.14% yield it hit on April 5, 2002. Initially, bonds gained in anticipation of the fact that cut-off yields at the gilt auction wouldn't be very high. However, the central bank set a higher cut-off yield of 7.55% and 8.35% for its 8-year and 20-year bond, respectively, auctioned during the week. As a result, bond prices fell. The downfall wasn't just confined to longer maturity paper. The 91-day T-bill yield also increased from 6.40% to 7.02% and the yield on the 364-day bill rose from 6.24% to 7.01% over the week.

As for call rates, they remained high in the 7.00-7.50% range till Wednesday on account of outflows (Rs 6,000 crore) for bond auction. During the time it also traded at close to 8%. However, call rates finished the week in the 6.50-6.75% band as banks had already covered their CRR requirement ahead of the reporting Friday. Hence, there wasn't too much demand for cash.

The rupee too remained in the higher band on concerns about the border situation. After touching a low of 49.02 to a dollar on Wednesday, it stayed put at that level for three straight days after moving in a broad range. Fresh inflows of dollar on Friday saved the currency from slipping further. Overall, rupee became weaker by 2 paisa over the week.

The gilt scam, which continued to hog the limelight, has once again raised a question mark against the regulatory lapse in our financial system. Very little has changed since 1992, regarding the control and supervision of co-operative banks and PFs. Worse, there has always been a lack of co-ordination between supervisory bodies: SEBI, RBI and the finance ministry. Unless they learn to work together, scamsters will continue to thrive. Also, if investigations are not expedited, Ketans of the world will exploit loopholes in the system to their advantage and swindle public money. In this case though a joint investigation team has been appointed to look into the current gilt scam. Whether this will nip the problem in the bud remains to be seen. But for now, every drop in the ocean counts.

Outlook

Movement in gilt prices will primarily be determined by developments on the border. If the tension eases, it could trigger a marginal rally. That apart, if the finance minister approves the Central Board of Trustees' decision to maintain the EPF interest rates at 9.5%, it could lead to a further fall in bond prices. As for call rates, they will hover around 6.50-7.0% since liquidity position is relatively comfortable and demand for funds is weak. Here again, skirmishes between India and Pakistan may push rates northward.