In spite of a fall in inflation, debt markets remained flat this week. The yield on the 10-year benchmark GOI security (2013 9.81%) remained at 5.76 per cent, marginally higher compared to what it was the previous week. The daily average trading volumes in the debt market fell by nearly 30 per cent this week compared to last week. This week, the Reserve Bank of India auctioned Rs 7,000-crore worth of state government loans, which put some pressure on the liquidity during mid-week. However, much of the trading was witnessed in selected medium and long-term securities—six years and above—which led to a marginal rise in yields.
Inflation based on the year-to-year change in the Wholesale Price Index (WPI) moved down to 5.65 per cent for the week-ended May 24, 2003, after remaining static at 5.9 per cent over previous two weeks. This has been due to a fall in the prices of food, non-food and manufactured products, while domestic fuel prices remained firm. But yields on debt securities still remained flat. Low liquidity at the time of the auction put an upward pressure on yields.
The central bank had conducted a Rs 7,000-crore auction of 6.35 per cent, 2013 state government loans on Thursday. The interest rate spread between the loan and the 10-year benchmark was a considerable 50 bps. As a result liquidity tightened, while the call rates remained firm in the 4.9-5 per cent range, subscriptions to the repo amount slipped to Rs 4,315 crore on Thursday. Overall, for the week call rates remained in the range of 4.5-5 per cent range and the daily average repo subscription to the RBI amount fell by over 50 per cent vis-a-vis last week.
As for the domestic currency, it continued to appreciate and gained 14 paise vis-à-vis the dollar over the week, to end at Rs 46.73/$. A lack of dollar demand from importers as well as the weakening dollar globally led to strengthening of the rupee. The rupee appreciation was witnessed on all trading days, except Friday. Banks covering short positions prevented the rupee from gaining strength that day. The forex reserves touched a new high of $81.67 billion, as on June 6, 2003. This could encourage the government to consider pre-payment of its foreign debt.
In a significant development, the RBI has allowed primary dealers in gilts to hold trading positions in the interest rate futures markets. Earlier, primary dealers were allowed to only hedge the underlying gilt portfolio.
Outlook
With no auction in the coming week, the bond market is likely to remain range-bound. Also, liquidity is likely to be comfortable.
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