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Bonds Still on the Move

The yield slide continued amidst low activity during the week. The benchmark 10-year yield and the 5-year corporate bond yield slid to touch a new low for the year.

Bond market maintained its lethargic approach. The participation, which was low initially due to the September-end closing for banks, gathered some momentum towards the later half of the week. This was evident from the daily trading volumes at wholesale debt segment of NSE, which reached Rs 5000 crore almost after a month. Overall the yields dropped in the range of 4-7 basis points across maturities. The 10-year benchmark stayed in its last month's range of 7.13% to 7.19%, to end a tad lower at 7.12%.

The corporate bonds yield is also touching new lows every day. For Instance the benchmark five-year Hindalco bond touched a lifetime low of 7.12%. The difference in spread between this paper and the corresponding maturity five-year government security has come down to around 87 basis points.

As liquidity remains ample in the system, the call rates traded in the dead range of 5.55-5.75% and hence RBI repos continued to receive aggressive bids. This should bode well for the first auction for the second half of the year worth Rs 7000 crore, which is scheduled for next week.

The rupee gained 2 paisa against the dollar over the week. Mid-week, the rupee touched an eight-month high of 48.35/$ backed by strong dollar supplies from exporters and inward remittances. However, dollar buying by state owned banks prevented the rupee from the gaining further ground and ended the week at 48.36/$.

Our economy seems to be on a recovery path. As per the first quarter data released by the government, our GDP grew by 6%, against the expected 5.5% growth. This combined with healthy 15% growth in exports and 75% jump in FDI for the third straight quarter, proves the fundamental strength of the economy, and is in contrast to the S&P downgrade.

Outlook
Much of the activity will be centered at the long-end of the curve as the fresh auction is in the above 10-year segment. Moreover as the first phase of revised lending and borrowing norms for banks in call money market came into effect on October 5, the trading volumes in call market are likely to drop significantly. On the other hand, this may trigger higher volumes in the RBI repos.