That the markets have discounted war tensions is evident from the fact that bond prices moved up marginally over the week. It wasn't the case at the start of the week when a hard-line speech by Pakistan's chief executive, Pervez Musharraf, and a possible auction, dampened sentiments, taking the yield on the 10-year benchmark (11.03%, 2012) upwards to 7.84% on Tuesday.
Markets heaved a sigh of relief when the government decided to privately place two long-term bonds with the RBI instead of putting it on the auction block. This coupled with a rather soft response of foreign minister Jaswant Singh to Musharraf's speech gave a boost to the bond market. Consequently, the yield came down to 7.66% the following day. But the sale announcement of 2026 paper through RBI window triggered a sell-off. The bond prices rose from Friday's low after defense minister George Fernandes remarked at an international conference in Singapore that there is no imminent danger of war. The yield on the benchmark finally closed at 7.75% on Friday, down just 2 basis point over the week.
To suck out excess liquidity from the market, the central bank sold the 2026 security (worth Rs 2,000 crore) through an OMO on Friday. However, this didn't have an adverse impact on the market, as most bidders were long-term investors. Earlier during the week, the government didn't take the auction route as it could have hurt market sentiments severely. This prevented the further rise of bond yields and helped in retaining liquidity in the market. The yield on the benchmark had touched a high of 8.20% last week.
With the current private placement, the government has already met 22% of its borrowing target of Rs 1,43,000 crore for the fiscal 2002-03. And another 4% will be met in the coming week as per the calendar. The government will auction securities worth Rs 6,000 crore -- 10-year, Rs 4,000-crore bond and the 20-year, Rs 2,000-crore paper. However, this won't lead to liquidity squeeze in the market as that will be balanced out by the inflow of the same amount through CRR reduction on June 1, 2002.
Call rates this week fell below the refinance rate of 6% as banks had already met their reserve requirement ahead of the reporting Friday. The surplus money to the tune of Rs 37,923 crore found its way to RBI's repo auction. Call rates finally closed in the 5.75-5.90% range on Friday.
As for the rupee, war tensions continued to impact the domestic currency. Rupee slipped to 49.0375/$ on Friday, losing 5 paisa over the week against the dollar. The currency further came under pressure as the US, as a precautionary measure, asked its residents to leave India. In the current calendar, the rupee became weaker by 8 paisa.
Outlook
Despite the auction scheduled for the week, bond prices are likely to remain stable as liquidity will be in the comfort zone with the infusion of Rs 6,000 crore into the system on account of CRR reduction, effective June 1. Call rate will remain low and will hover around the 6% level (read: comfortable liquidity). Of course, we can't rule out any unfortunate event happening at the border, which could spoil the party any time.
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