This week the bond market was groping for direction amidst worries of a prolonged war, tight liquidity, high crude oil prices and financial-year end considerations. The advance tax and state loan outflows, which had sucked out nearly Rs 17,000 crore from the system, saw overnight call rates remain in the 6-7 per cent range for the entire week. While the apex bank did not receive any repo subscriptions, it pumped in Rs 27,970 crore through the reverse repo route.
Thus, initially, the benchmark 10-year GOI security had moved up from last week's closing level of 6.35 per cent to touch 6.41 per cent. Despite that market participants had some reasons to cheer about. First, they expected that government spending would increase as most state departments rushed to make use of their budgetary allocation for the current fiscal. This view was substantiated by the surplus in government's short-term overdraft account with the Reserve Bank of India (RBI). And secondly, the market had already discounted a cut in both the CRR and the bank rate, ahead of the monetary policy on April 29. As a result, the 10-year benchmark yield touched 6.32 per cent during mid-week. Again towards the end of the week, an expectation of a prolonged war acted as a spoilsport. A long war would mean a rise in oil prices—which had come down drastically despite the war—which, in turn, would lead to a rise in inflation. Hence, the 10-year benchmark ended the week at the 6.30-per cent level.
On the forex front, the domestic currency continued to appreciate, gaining 12 paisa to touch Rs 47.55/$. Though on Friday, the rupee had hit an intra-day high of Rs 47.53/$. A further appreciation, however, was prevented by the apex bank's intervention. Overall, a persistently weak dollar internationally and exporters selling dollars in the market saw the rupee strengthen. Exporters have been offloading dollars in the market on expectations that the rupee will appreciate further.
Outlook
Historically, the month of March has been volatile and April starts with ample liquidity in the system. Banks re-enter at the long-end of the market ahead of the monetary policy, in anticipation of a rate cut. The story is the same this year too, as the benchmark 10-year yield has moved in the 5.96 per cent and 6.48 per cent range. Moreover, most market participants have already discounted reduction in the CRR and the bank rate. Bond markets are expected to take a cue from gilt auction calendar, which is to be announced next week. The yield curve thus is likely to be defined by the maturity tenure of fresh supply of gilts.
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