Bonds traded in a narrow range with little higher activity in long dated government bonds and corporate bonds. In early sessions, bonds gained a bit on remote expectation of cut in benchmark, which was soon denied by the Reserve Bank hurting the sentiment. On-tap supply of 10-year state government bonds was also expected. However, markets participants remained cautious until RBI reduced the auction amount of fresh long-dated papers. Thereby liquidity of nearly Rs 1000 crore remains within system.
The new issuance will be of long tenure -- 15-20 year. This boosted the 2021 and 2026 bonds which were up 95 paisa and 75 paisa respectively. For the relatively shorter maturity, the 5-year corporate bonds outperformed the similar tenure gilt. The yields on corporate fell by 16 bps, against a 7 bps fall in like tenure gilts. With growing market interest in corporate bonds, corporate debt volume surged from 950 million to 1.15 billion over the week.
Towards the end of week, RBI governor reiterated denial of an immediate bank rate cut and bias for comfortable liquidity. Overall, bonds remained lackluster with the 10-year benchmark paper (2012 7.40%) closed little below its previous week level of 7.17%.
The strong rupee gained further, as the RBI governor expressed his comfort. And the comfort is understandable -- with a forex reservoir of 60 billion dollars, which can meet 61% of its external debt of 98.4 $billion as on December 31, 2002. The improved external debt management can also gauged from decline of debt-service ratio from 35.3% in 1990-91 to 13% in December 2001. The only threat to this ease could be a spurt in international crude prices.
Money markets were at ease too, given the ample liquidity. But surprisingly the 91-day T-Bill yield has remained stagnant at 5.81% in August, while that of 364-day T-Bill has declined marginally to 5.98%.
Outlook
The case for a bank rate cut to boost credit-offtake is weak, as 60% of banking lending is still being made at below PLR levels. Besides, the drought effect is visible with a decline in total food credit offtake (as per RBI figures) since the end of July. The resulting high liquidity and lack of avenues is driving banks to extend cheap credit. So, even without a bank rate cut, RBI is likely to ensure a stable interest rates through monetary measures, as the governments 40% borrowings this fiscal remains outstanding.
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