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All eyes on the RBI

With the credit policy around the corner expectations are being built up for a rate cut.

Bond markets had a good week and yields fell across the board, especially towards the end of the week. The initial low activity level picked up on the last two days forcing yields to reach new lows. The huge surplus in the system brought about fears of an OMO sale. But this was short-lived and indirect hints from the RBI governor eased up the market strengthening the belief that a rate cut is in the pipeline. This view was also supported by the third successive week of declining inflation.

With no more auctions scheduled for the rest of the month the bullishness in the market was clearly evident. The auction of the 4000 crore 15-year paper was oversubscribed three and half times. The yield on this was aggressively priced by the central bank at 7.4015 percent. This paper ended the week with an eight basis point fall in two days to reach 7.32 percent. The yield of the 10-year benchmark also fell to touch an all time low of 7.03 percent.

The previous week's reduction of spreads between corporate bonds and Gilts, was reversed up to a certain level. After touching below seven-percent yield level last week the 5-year Hindalco surfaced above the 7 percent level in the middle of the week. But it ended the week close to the level at which it had started.

The call market was flat through out the week, and call rates ended at 5.65-5.75 level. Repo auctions were also low, but gathered pace on the last two days due to redemption of T-bill worth 10000 crore. The average repo auction was low at 14000 crore in the week.

Rupee depreciated by 6 paise during the week to reach 48.395 level. The sudden fall was due to unexpected demand from a big private company. Forex reserves continued their uphill climb and ended at close to 64-billion dollar mark on October 11, 2002.

The economy is looking up. A slew of data coming shows a tapered down affect of shortfall of rainfall. The good corporate results are also added to the feel good factor

Outlook:
The liquidity in the system is expected to be at comfortable level and the yields would remain range bound. The repo auctions would continue to see high activity.