Bond markets made merry with gilt prices moving up across maturities. Abundant liquidity and increasing hopes of a repo rate cut after the rate cut by the European Central Bank (ECB) buoyed market sentiment. On Thursday, the ECB had cut the benchmark rate from 2.50 per cent to 2 per cent to aid a struggling European economy.
Initially though, bond prices took a hit, ahead of the scheduled auction, but that was short-lived as the auction received a good response. However, on Friday, the RBI ruled out a repo rate cut in the near term, which led to a rise in bond yields towards the end of the trading session. As a result, the yield on the 10-year benchmark GOI security (9.81%, 2013)—after touching a high of 5.81 per cent on Monday—ended the week at a new low of 5.76 per cent – down 3 basis points over the week.
The average trading volumes remained at last week's level of Rs 6,200 crore. However, much of the trading activity was concentrated at the medium-to-long end of the curve, where bond prices rose by 20-40 paisa over the week. Thus, the yield curve has flattened a bit. For instance, the spread between the 6-year and the 15-year paper has come down from 0.54 bps in the previous week to 0.51 bps this week.
On Tuesday, the RBI re-issued the 6.85% 2012 bond for Rs 6,000 crore and a new 25-year bond for Rs 3,000 crore. Both issues were heavily oversubscribed highlighting the fact that there is excess liquidity in the system. Excess liquidity was also reflected in the amount of money received in the daily repo auctions—over Rs 20,000 crore on an average. The inter-bank call rate too remained below the repo rate (of 5 per cent) in the 4.75-5 per cent range.
As for the rupee, it gained 22 paisa over the week to close at a two-year high of Rs 46.87/$ on Friday. The domestic currency has benefited from the weakening of the dollar globally and increased dollar inflows in the recent past. Internationally, the euro gained against the dollar this week despite a 0.50 per cent cut in the interest rate by the ECB. Many foreign funds have hiked investments in the Indian debt market owing to the interest rate differntial. The six-month premium, however, went up by 73 bps over the week to close at 1.82 per cent on Friday. Meanwhile, India's forex reserves rose to touch $81.33 billion in the week-ended May 30, 2003, up from $80.82 billion the previous week.
In an interesting move, the government has decided to pre-pay 11.3 per cent (Rs 7,490 crore) of the total bilateral debt of Rs 66,316 crore to 14 countries. In addition, the government has also decided to discontinue receiving aid from several bilateral partners. Both these measures are part of the government's recent policy to reduce dependence on external aid, which, in turn, will bring down the fiscal deficit.
Outlook
The bond market may see some correction in the first few days of the week as the RBI has said that there won't be a repo rate cut in the near term. However, with no scheduled auction in the coming week and liquidity being comfortable, the bond market is likely to remain range-bound over the week. But a lot will also depend on which way inflation is headed.
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