The RBI governor Bimal Jalan's remarks on economic growth and inflation saw bond markets revise their expectations of a rate cut. The apex bank expects inflation to hover in the 5-5.5 per cent band for the current fiscal. Thus, government securities started the week on a cautious note, remaining unmoved on bullish auction results, but turning volatile mid-week before notching up some gains towards the end. While the 10-year benchmark 9.81% GOI had inched up from 5.85 per cent to 5.92 per cent, the longer-tenure 8.07% GOI 2017 had moved up from 6.08 per cent on Monday to 6.17 per cent by the end of the week.
Bond markets—which have more or less discounted a 25 basis point (bps) cut in the bank rate—were worried that high inflation may prevent the central bank from continuing with its soft interest rate strategy. Even the Rs 7,000-crore auction—which received a good response—and the long maturity 7.95% 2032 GOI, which was re-issued at 5 bps lower than last week's closing of 6.38 per cent, failed to ignite any bullish sentiment. However, towards the end of the week, apprehensions about high inflation took a backseat and value buying brought down the gilt prices by nearly 10-40 paise.
On the other hand, the apex bank continued to stem the rupee's appreciation by buying dollars from the market. In the past few weeks, steady call rates (4-5 per cent range) have seen players bid aggressively in RBI repos, which yield 5 per cent. In fact, this fiscal the repo subscriptions in the first month aggregated to Rs 3,98,997 crore—more than twice the amount (Rs 1,51,190 crore) accumulated in the same period last fiscal. Due to the central bank's intervention, the domestic currency traded in a narrow range against the dollar through the week, ending the week at Rs 47.35/$.
Starting next week, key stock exchanges will commence trading in interest rate derivatives. Considering the volatility experienced by bond markets in recent times, these instruments are likely to give a leeway to market participants—especially income funds—to manage interest rate risks in a better way.
Outlook
As was the case this week, bond markets are likely to be nervous till the monetary policy is announced on Tuesday. Market participants are expecting a 25 bps cut each in both the bank rate and the CRR. Income funds—15 out of 36 have stretched their average maturity over six years (as on March 31, 2003)—too will gain from a rate cut. If the rate cut fails to happen, it may well set off panic selling. Whatever be the outcome, investors should not let short-term movements affect their long-term investing goals.
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