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Not Too Good, Not Too Bad

Bond prices inched up marginally amidst comfortable liquidity. The yield on the 10-year benchmark closed at 7.34%. The future course of bond action will depend on the cut-off yield set at the twin-bond auction scheduled for next week.

Following a subdued start, government securities ended the week with marginal gains. The yield on the new 10-year benchmark (7.40%, 2012) closed at 7.34% -- down 8 bps over the week. In the wake of ample liquidity in the system, the prices of short- and medium-term bonds moved up initially, outperforming their long-term cousin. And then came the dampner. The labour minister's decision of keeping the EPF rate unchanged -- not in line with the government's stance of a softer interest rate regime -- at 9.5% for the current financial year saw the liquidity-driven rally slow down in the middle of the week.

To cap it all, on Friday, the RBI announced that it would conduct an auction of Rs 7,000 crore on Wednesday in the following week. It was expected considering that the government has touched the ceiling on its short-term credit facility with the apex bank. What surprised market players though was the auction amount set by the RBI. The announcement of an unscheduled auction pulled the prices down. Consequently, the yield on the benchmark remained flat on Friday.

Huge outflows of about Rs 24,307 crore towards repo auction clearly indicated that there was ample liquidity in the money market. For most part of the week call rates remained in the 5.6-5.75% range. The RBI's unscheduled announcement of an auction as well as last-minute demand by banks to meet their reserve requirement on account of reporting Friday saw call rates inch up marginally to 5.75-5.85%. The central bank has ruled out any further cut in the repo rate in the near term. If you recall repo rate was cut by 25 bps last month.

Meanwhile, with yields having bottomed out, many corporate players -- like Infrastructure Development Finance Corporation, Indo Gulf Corporation, Grasim, NTPC and Reliance -- tapped the market to capitalise on the opportunity of raising funds at a cheaper price.

On the currency front, the rupee over the week became stronger by 5 paisa, closing at Rs 48.78 against a weakening dollar internationally. After a stable ride last week, the dollar again lost ground this week on concerns over accounting scandals in the US. Apart from exporter remittances, FIIs inflows to banks and NRIs boosted dollar supplies. As for India's foreign exchange reserves, they have moved further up to touch $58 billion for the week-ended July 5, 2002.

That apart, Indian economy is on the path of recovery. According to the latest data released by the CSO, the Index of Index Production went up by 3.8% in May. The manufacturing sector, which accounts for two-thirds of the weightage, has clocked a 3.8% growth in April-May. Also, the government's revenue collection for the first quarter (April-June) has recorded a 20.2% rise.

Outlook
Medium to long-term securities will be in focus ahead of the twin-bond auction of 10- and 15-year paper due for the week. The cut-off yield that RBI sets will determine whether the apex bank is comfortable with the current low yields or not. However, shorter bonds are likely to remain unaffected. The strong balance of payment position coupled with the weakening dollar internationally would help the rupee stay stable.