This exciting week of mid November started slowly and ended with the yields ending at new lows again. The yield of the benchmark ten-year paper has been making new life time lows for three straight weeks. Last week's tight cash position continued for the first two days. This did not let yields, go much lower. But this cash crunch was temporary and by the end of the week, the market was again flush with funds. High redemption and coupon payments were the main reason for this easy liquidity. The totals fund infused into the system on Friday were around Rs 39 thousand crore.
Comfortable liquidity on Wednesday, combined with various other factors made yields fall across the board. Factors like the acceptance of the UN resolution by Iraq and anticipation of an upgrade of foreign debt rating by Moody's acted as the driving force in the latter part of the week.
The lowering of Cash Reserve Ratio, which had to come into affect on Saturday and no action by RBI to suck the high liquidity also, helped yields to slide. The ten-year benchmark touched an intra-day low of 6.532 per cent on Friday, before closing at 6.6 per cent.
The corporate bond yield also followed suit and fell across the board. The spread between corporate bonds and gilts of five-year maturity narrowed down to 45 basis points during the week. But by the end it finally broadened to 49 basis points on Friday.
The tight cash position made call rates jump to a high of 6.2-6.4 per cent on Tuesday. But major cash inflows later in the week, sent call rates hurtling down to between 2 and 4 per cent, inspite of this being a reporting Friday. Most of the repo bids during the week were also rejected, and after a long time a reverse repo bid of Rs 50 crore was received and accepted.
The rupee stayed range bound throughout the week, but appreciated by 7 paisa at the end to reach this years' high level of 48.2. This was due to high inflows during the week. Forex reserves also passed the 65 billion-dollar mark to end at 65.376 billion dollars on November 8.
Not only the debt market but the Indian government is also flush with funds. This has made the RBI to cancel the government's scheduled auction of 5000 crore in the next week. In its place an OMO of the same amount has been announced.
Outlook
The liquidity position is going to be the main issue driving the market next week. And the open market operation of the 15-year paper is expected to be fully subscribed. Call rates are expected to rise back to normal levels.
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