Debt markets have cooled down, to some extent. The rally, which started in November after the monetary policy was announced, has gradually slowed down after RBI took a series of steps to stabilise the market. The yield on government bonds fell sharply in November and touched new lows week after week.
This week started on a cautious note. Following the RBI's announcement of increase in the 91-day T-bill auction amount, there was concern over tight liquidity and the cut-off price at the T-bill auction. This led to low trading volumes on the first three days. The yield on the 91-day and 364-day T-bills had fallen below the repo rate on November 27. It was expected that the treasury bill auction would give direction to the market. Concerns on the short-term yield front, caused some correction in the short-term gilts. For instance, the 12.5% 2004 paper rose by almost 11 basis points over the week. The yields on these papers were set at 5.45 per cent and 5.52 per cent, respectively, at the auctions on Wednesday.
The T-bill cut-off price and advance tax outflows were not able to give direction to the market and the yield on the medium and long-term government securities, after rising till Wednesday fell on the next two days. The 10-year gilt benchmark, which had touched 6.42 per cent on Tuesday, fell to 6.35 per cent on Friday morning, finally closing the day at 6.367 per cent.
The corporate bonds also remained range-bound, with the yield on the five-year paper falling after rising till Wednesday. The top-rated five-year Hindalco paper rose to 6.43 per cent from last week's 6.37 per cent to finally close at 6.38 per cent on Friday. The spread between the five-year corporate bond and the government bonds has continued to hover around historic lows, ending the week at 43 basis points.
The bids in the short-term money market were low and can be attributed to the general liquidity concerns. The repo auctions during the week were as low as Rs 2,520 crore on Wednesday while the average daily auction size last week was around Rs 15,000 crore. The call rates remained steady throughout the week in 5.40-5.50 per cent range.
On the exchange rate front, the spot rupee-to-dollar rate touched the year's low of Rs 48.15 on December 11. The rupee has been appreciating against the dollar, after touching Rs 49.04 in June this year, backed by high forex inflows into the country. The forex reserves rose to $67.75 billion in the week-ended December 6, 2002.
Outlook
With liquidity position easing out by the end of next week, the yields are expected to move a tad down. The new call money norms set by the central bank are expected to have a positive fallout in the near future. With lending and borrowing limits in the call market being reduced, the bank deposit rates are expected to be revised.
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