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Slowing Down

Taking cue from last week's twin OMO, bond markets feared the apex bank to redo its act again. This along with the absence of any further reduction in the US fed rate saw the markets remain range-bound.

The bond markets had a rather lacklustre week. Rumours of a fresh OMO and no reduction in the US Fed rate discouraged participants from making fresh purchases. The benchmark 10-year GOI 2012 7.40% -- which reacted fast to RBI governor Bimal Jalan's statement on excess liquidity in the system last week -- moved up to 7.21% before the start of the week, and remained range-bound at 7.18-7.20%. Across the yield curve, it was the 10-13-year bond segment that witnessed major activity, showing an upward price movement of 18-24 paisa over the week.

Last week's two successive OMOs were termed, by governor Jalan, as a liquidity-sucking exercise. This dented the market sentiment as players had built positions, ahead of the Federal Reserve meet on Tuesday. However, with that not happening either a mild correction was an expected outcome. Incidentally, the system is still flushed with funds, as is evident from the call rates, which have been moving in the dead range of 5.65-5.75% since the start of this month.

As for the domestic currency, it touched new highs against the dollar, gaining 7 paisa over the week. The reason: supply exceeding demand for the dollar. With a sustained appreciation, perhaps importers -- hoping that there would be no reversal in the trend soon -- have also been postponing their dollar buying for hedging purposes.

While the bond markets have had a comfortable journey so far, its prime constituents – the banks -- seem to be in a fix. It is expected that the Non-Performing Assets Ordinance -- expected to be passed in the monsoon session of Parliament -- is aimed at giving more powers to banks to tackle defaulters. However, corporate India, which has been blaming banks for delaying loan sanctions, have lobbied hard for dilution of certain provisions of the Bill. On the other hand, the Lender's Liability Bill -- empowering corporates/borrowers against any delays, etc., by banks is also expected to come through -- will arm both parties to raise voice against each other. At the same time, most banks have agreed to share the list of defaulters. On its part, the apex bank has come out with a notification to help banks prevent money laundering in the system. All this will bode well for the financial system if these reforms are enforced strictly.

Outlook In the coming week, the RBI will conduct a Rs 4,500-crore, 10-year state loan auction. But then we all know of the market's appetite for state auctions. The same should not dampen the sentiment, given that the apex bank is expected to reduce the size of the Rs 6,000-crore auction, scheduled for last week of August.