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Ample Liquidity: The Only Trigger

Easy supply of money and marginal fall in inflation drove the government bond yields lower. The triggers next week would be the state loan auction and of course a further fall in inflation.

It was the movements in the forex market and not the government securities market, which dominated the week. With a deluge of dollar inflows, the domestic currency appreciated by 16 paise to reach Rs 47.18/US$. This translates in to a weekly gain of 0.30 per cent weekly gain – the highest in the calendar so far. The domestic currency's rise also comes on the back of steadily falling value of the dollar in the international market. With the US economy showing faint signs of recovery, lacklustre performance of its equity markets and lowest bond yields, the dollar-denominated assets are said to have flown to other currencies such as the Euro. Thus over the week Euro appreciated from $ 1.1283/Euro to $1.1535/Euro.

Back home, the 6-month forward premium crashed from last week's closing of 1.66 per cent to 1.02 per cent till Thursday. One of the reasons for the recent slide in forward premiums has been the absence of demand for forward cover from importers who expect the rupee to remain strong in near future.

At the Bond Street, the government bond prices edged up by Rs 0.40-Rs 1 across the yield curve. The drop in inflation from 6.47 per cent to 6.16 per cent and easy money supply nudged yields down. At the same time it is felt that the upcoming Rs 6700 crore state government auction of 10-year paper will squeeze the liquidity from the system. The market focus was on the medium-end of the curve, where the yields declined by 11 basis points against 7 basis point drop in the long-end paper. Infact since the announcement of Credit Policy, the yields on the 2008, 2009 and 2011 paper has fallen by 17-26 basis points against a mere 3-4 basis point fall in 2015, 2017 papers. High inflation fears and the signals of no more rate cuts in the Policy are believed to have drawn interest in the medium-segment of the market.

Ample liquidity in the system kept the call rates in the 4.25-4.75 per cent range and the excess money flowed in to the RBI repos.

Outlook
In the absence of any strong triggers, bond markets are expected to take a cue from the WPI-inflation figures on Monday. If this shows signs of a decline, the market interest could once again shift towards longer tenure bonds.

Meanwhile the key central banks of America, England and Europe have kept their key benchmark interest rates unchanged, as they want to see the trickle down effects of previous rate cuts translating into higher economic growth. Though RBI has done the opposite, but the broad market belief is now in line with the global view-- that interest rate will reign in stable zone.