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A Listless Market

Despite ample liquidity and inflation under control, debt markets remained listless. In the coming week markets will take a cue from the scheduled auction of Rs 5000 crore and inflation numbers.

In a week with three trading days, the debt market remained in a lackluster mode, despite comfortable liquidity and inflation remaining under check. The yield on the 10-year benchmark GOI security (2013 9.81%) remained flat at 5.89 per cent. The inflation based on the Wholesale Price Index (WPI) moved down from 6.16 per cent to 6.14 per cent in the week ended April 26, 2003.

The daily average trading volumes fell by 22 per cent this week compared to the last. However much of the trading was in the medium to long tenure securities, which saw marginal fall in their yields. The yields of the short term gilt remained flat.

RBI Governor Bimal Jalan indicated that there would be no repo rate cut in the near future. The repo rate that is currently 5 per cent was left untouched in the credit policy. The RBI also expects inflation to ease as monsoon is expected to be better than last year.

Meanwhile the Central Bank conducted an auction of state government bonds, having 10-year maturity. The coupon was fixed at 6.4 per cent. This was done with the view of raising Rs 67.4 billion for 27 state governments, with the option of retaining excess subscription of up to 30 percent. This led to a sharp fall in the repo amount (by 50 per cent), compared to the previous week. However, call rates remained in the range of 4.75-5 per cent indicating abundant liquidity in the debt markets.

The Rupee continued to appreciate this week too and ended the week with the gain of 4 paise against the dollar. The 6-month premium touched a high of 1.26 per cent but remained nearly flat for the week at 1 per cent. Foreign investors are believed to have invested money in the Indian bond market. This is not only due to the arbitrage opportunity of the differential interest rate in developed and developing nations, but also because of the rise in the rupee vis-à-vis the dollar.

Outlook
Debt markets will be guided by the scheduled auction of Rs 5000 crore of 10-14 year securities in the coming week. A lot will also depend on inflation, which is likely to be under control as crude oil prices have come down globally.