This week, bonds lost most of the gains it made in the previous week. In other words, the post-Budget euphoria of a 1 per cent cut in the small-savings rate and the subsequent reduction in the repo rate by the Reserve Bank of India (RBI) failed to cheer-up the bond market this week. Although there were many reasons for the grim mood, a possible war in the Gulf did the maximum damage. The sentiment was also weighed down by the concern over the liquidity crunch in the coming week on account of state government bond auction and advance tax outflows. Consequently, the yield on the 10-year benchmark (2013, 9.81%) after touching a low of 5.96 per cent on Monday closed the week at 6.32 per cent on Friday.
All these developments led to a consistent decline in trading volumes -- from Rs 4,600 crore on Monday to Rs 1,800 crore towards end of the week -- in the wholesale debt market. The higher-than-expected cut-off yield at the 91-day T-Bill auction also hurt the market sentiment. The sentiment was further affected when the RBI announced an auction of Rs 5,753-crore state government bonds on March 12, 2003. This is likely to squeeze liquidity in the system.
Debt mutual funds too lost over the week, thus almost neutralising the gains made on the Budget day. An average bond fund was down 1.21 per cent and an average gilt medium and long-term category lost 2.51 per cent. On the Budget day, both these categories had gained 1.9 per cent and 2.9 per cent, respectively.
While last week liquidity was tight in the system, this week it was comfortable. No reverse repo auctions and a high daily subscription to repos – average Rs 7,000 crore – bears testimony to this. Call rates too remained below the repo rate till Thursday. With liquidity expected to be tight in the coming week, call rates closed the week a tad higher at 6-6.25 per cent on Friday.
Uncertainty gripped the corporate bond market too. The yield on the benchmark 5-year corporate bond moved up by 55 bps to touch 6.75 per cent. And the spread between the 5-year benchmark corporate bond and a similar-tenure GOI security narrowed to 42 bps from last week's 44 bps.
On the forex front, the rupee gained a paisa and ended the week at Rs 47.65/$. The rupee has been appreciating due to robust dollar inflows thanks to better exports and higher NRI remittances. However, India's forex reserves fell marginally from $75.354 billion on February 21, 2003 to $72.877 billion in the week-ended February 28, 2003. This was on account of the government buying dollars to pre-pay some hard currency loan. But, if war breaks out in the Gulf region, the rupee could come under pressure following a rise in global oil prices. The price of the Brent crude touched a high of $33.65 per barrel on Friday.
Outlook
In the coming week, liquidity could be a cause of concern ahead of the state government bond auction and advance tax outflows. With March being the last month of the financial year, traders and banks will also be booking profits in gilts thus putting further pressure on bond prices. But as market players have already discounted this, markets are likely to remain stable and would move in a narrow range. Also, a lot will depend on what transpires in the Gulf region.
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