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A Lacklustre Week

With financial markets closed for most part of the week, there was little activity at Bond St. Owing to lethargic participation, bond yields moved in a narrow range.

A week which witnessed just a two-day trading cycle due to holidays, the bond market was in a listless mode. Thanks to ample liquidity in the system, call rates moved in the 4.25 per cent-4.75 per cent range. Thus, excess money supply (Rs 48,873 crore) found its way to RBI repos. The government bond yields traded in the narrow range with the yield on the 10-year benchmark paper barely moving from last week's close of 5.86 per cent.

The rise in inflation, which had touched a high of 6.24 per cent for the week ended March 29, threw a spanner once again. Besides market participants also sat on the fences in anticipation of the announcement of the tenure of the securities for which RBI will conduct a Rs 7,000-crore auction next week. As the apex bank announced the re-issue of GOI 2018, 6.25%and GOI 2032, 7.95%, the yield on both securities moved down by 2-3 basis points in the secondary market.

As for the domestic currency, the rupee appreciation was stemmed by public sector banks' intervention, which bought excess dollars from the market, thereby preventing the rupee from strengthening further. The domestic currency lost three paise against the dollar, finally closing the week at Rs 47.35/$. However, forward premias crashed as exporters, who were expecting the rupee to continue appreciating in the near future, sold forward contracts. The three-month and six-month forward premia dipped by 0.29 per cent and 0.17 per cent, respectively, over the week.

All eyes will now be set on the yields at which the Reserve Bank of India (RBI) will conduct twin-GOI auction next week. As government will be largely borrowing through longer maturity securities, the RBI is unlikely to give any negative signals by setting higher yields on the re-issue of 15-year and 29-year maturity securities.

Ongoing transporters' strike perhaps led to the inflation moving up from 6 per cent to 6.24 per cent for the week-ended March 29. The strike saw a sharp rise in prices of primary goods. While rising inflation has put the real interest rates in the negative territory, the apex bank has expressed its comfort with current inflation levels. However, a continuous rise in inflation over the next few weeks could force the RBI to reverse its stand.