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Sticky Bonds

The bond market this week saw little action and with all the problems in the economy, the yield does not seem to be going anywhere. The 10-year benchmark bond after the initial up went down to settle at 7.17%.

The factors this week were many, but the yield of the benchmark remained in a narrow range. If the last week saw sovereign downgrade, this week saw attack on Gujarat temple, which added to the already critical position of higher oil prices and rising inflation. But the market showed strength, and the yield on the new 10-year benchmark (7.40%, 2012) closed at 7.17%- down just 2 basis points over the previous week.

With no offerings in the primary market, the trading volume was low and banks & mutual funds were flush with funds. This huge cash surplus offered the necessary support to the troubled market. The call rates remained in the range of 5.70-5.75% throughout the week. Though the banks who were nearing their quarter ending indulged in some profit booking at the slightest dip in the yield. Expectations of further rate cuts have minimized, due to high inflation and revival of the Indian economy. This was in sync with the US where they are experience a fragile recovery. The announcement by the labour minister to continue interest rate at 9.5% in the biggest EP fund also did not cause any major ripples in the market, though it was contrary to the govt.'s soft interest policy.

The Indian corporate bonds also showed similar position and the activity was low barring Tuesday when they touched their highest volume in the last one-month, 4.77 billion rupees. The reason was the ever-decreasing spreads between corporate bonds and gilts, which are in the range 80-100 basis points. The investors are using them to gain that extra leverage while traders are expecting to benefit from the narrowing spreads.

The central bank has till now raised 970.32 billion rupees, which is 67.92% of its budgeted gross market borrowing for the year 2002-03, through market borrowings and private placements. And after a gap of three weeks in accordance to its calendar, RBI is expected to announce auction of Rs.7000 crores, of which Rs. 4000 crores would be of 10 to 15 years maturity and Rs. 3,000 crores would be of greater than 20 years maturity. This would suck out a lot of liquidity which is seen to be an abundance inspite of last weeks advance tax outflows.

On the rupee front, the flatness of the week changed on Friday when rupee appreciated by couple of paise, following inflows through sale of equity in ICICI bank to foreign entities. The pace of rupee gains seems to have slowed down in the wake of rising international oil prices and dollar has also started appreciating against other international currencies.

President Bush has continued with his war rhetoric. However, an immediate military buildup does not seem to be likely with the softening of the stand by Iraqis, but the danger of oil prices rising is strong. This can add to the already high-energy prices and with it the necessary food items. The measured response from the Indian government, with respect to gujarat imbroglio, had provided the necessary relief during the week. Though after managing all the hurdles, divestment process also seems to have gone in cold storage and with it the objective of achieving the high growth rate.

Outlook
A stable interest rate outlook combined with the big auctions in the coming week, the market will experience high trading. Medium to long term securities would remain in focus and with the beginning of a new quarter the banks are expected to build on their investments.