This week too yields continued to move down, albeit marginally. The RBI's softer interest rate stance, abundant liquidity, robust forex inflows and higher weighted cut-off price set at the 12-year bond auction boosted market sentiments. Thus, the yield on the 10-year benchmark (9.81%, 2013) had fallen to 6.01 per cent by Tuesday. However, due to fears of RBI intervention and profit booking at the longer end of the curve, the yield on the 10-year benchmark firmed up to 6.03 per cent on Friday – down 2 basis points (bps) over the week.
The RBI governor Bimal Jalan, however, has ruled out any immediate cut in the repo rate or bank rate, throwing water on market expectations. With a sharp fall in yields in the recent months, markets had been expecting a 25-50 bps cut in the repo rate. The governor said that the outlook for inflation is good despite high oil prices and that the pace of government borrowings is comfortable. At the same time, the bond market gave a thumbs down to S&P's negative outlook on India, which has retained India's currency rating as 'junk' owing to disinvestment setback and mounting debt of central and state governments.
The RBI's bias towards low interest rate regime also prompted buying interest in corporate bonds, which pushed their prices up vis-à-vis gilts. Thus, the spread between the 5-year benchmark corporate bond and the similar-tenure GOI security narrowed to 36 bps, from last week's 41 bps.
Amidst comfortable liquidity, call rates too moved in the narrow range of 5.30-5.50 per cent till Thursday. However, liquidity tightening, due to reporting Friday, saw call rates firm up to 5.60 per cent by the close of the week. As a result, inflows towards RBI repos came down sharply.
In an interesting move, the government has relaxed overseas investment norms. Indians are allowed now to invest in companies listed abroad, provided that it has at least 10 per cent stake in any listed company in India. This is a big step towards full capital account convertibility. In the long run, this is likely to attract more forex inflows, as economies with fewer restrictions are more attractive for overseas investors. Meanwhile, India's forex reserves rose to $70.75 billion in the week-ended January 3, 2003.
The rupee gained 3 paisa against the dollar to end the week at Rs 47.97/$. The domestic currency, however, touched a high of Rs 47.93/$ midweek on account of increasing forex inflows and weakening dollar globally. But the state banks' intervention on the RBI's behalf prevented the rupee from appreciating further.
Outlook
All eyes are now set on the RBI. With completion of government borrowings, no more scheduled auctions are left in the fiscal. But as the market is flush with money on account of increasing forex inflows, yields may dip further provided RBI doesn't conduct an OMO. The market is likely to remain range-bound in the coming week.
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