It was a dull and dreary market this week. Speculation over a possible interest rate cut kept bond dealers busy. Most players feel that a repo rate cut is imminent, considering the high bids over the past few weeks in these auctions. At the same time a bank rate cut is also expected. For no other reason but to reduce the impact of the drought. At the same time these expectations also appear to be fully factored in and this is evident from the government bond yield touching a life-time low last Friday.
Government securities four-weeks' upward journey came to a halt. With the speculation on the interest rate cut on, some players indulged in profit booking, making the benchmark yield touch an intra-day high of 7.07 per cent on Friday. The yield on the 10-year benchmark (7.40%, 2012) settled at 7.05 per cent. This was a 2 basis point increase over the last week's close of 7.03%. Overall yields were range bound and the activity level was average in case of medium term papers. The central bank has also announced auction of 10-year loan by three-state governments worth 628 crore rupees. This will be held on October 30.
Corporate Bond market was moderately active, as volumes improved over the week. The spread between corporate bonds and gilts improved over the week from 65 basis points last Friday to 71 basis points this week. A number of state owned banks, including Indian Overseas Bank, Oriental Bank of Commerce and Vijaya bank, issued medium term bonds in order to capitalise on the lower yields.
The rupee strengthened on Monday. This was based on a fall in global crude prices. Towards the middle of the week this trend was reversed on account of some late demand from an automobile firm. Overall the currency markets remained range bound gaining one paisa over the last week to close at 48.39.
Liquidity in the market was sufficient causing the call rate to remain flat in the 5.65-5.75 per cent range. Compared to last three weeks' the repo auctions were low at 11723 crore. Seeing the otherwise high repo bids, economist expect a repo rate cut from RBI, to induce flow of funds into the economy.
On the economy front, infrastructure sector grew by 1.7 per cent year-on-year in September, compared to 4.1 per cent in the same month last year. The Infrastructure sector, which includes electricity, coal, steel, crude oil, refinery and cement had registered a high 9.3 percent growth in July and 6.9 percent in August this year.
With the Credit policy announcement scheduled for Tuesday next week, the market is expected to remain nervous. The pressure for a rate cut has been building, though the sentiment for a repo rate cut is stronger than a bank rate cut.