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Buoyont Sentiment

Comfortable liquidity, a fall in inflation and bullish sentiments over the Fed rate cut in the US helped keep sentiment positive in the debt markets.

Debt markets remained bullish this week with government bond yields falling over expectations of further softening of interest rates and ample liquidity in the system. The yield on the 10-year benchmark GOI security (2013 9.81%) ended the week at a record low of 5.73 per cent—down 3 basis points over the previous week. Inflation-based on the Wholesale Price Index (WPI) moved down from 5.65 per cent a week earlier to 5.44 per cent, for the week-ended May 31, 2003.

The central bank's declaration that there won't be any open market operations brought cheer to the debt market leading to gilt yields touching record lows. There were expectations of a repo rate cut, but the Reserve Bank of India (RBI) has decided to wait till the monsoon and inflation situation becomes clear.

But yields on G-secs fell to new lows on Friday as the market is anticipating a repo rate cut on expectations of a possible cut in the US Fed rate next week and a further fall in inflation. The possibility of rate cut triggered buying spree in the debt market. A cut in the Fed rate will give the RBI more leeway to continue with its soft interest rate bias. Trading in gilts was witnessed mainly across medium and longer-term papers (with maturity of over seven years). Any cut in the interest rate is likely to have maximum impact on these long-term papers.

In the money markets, the call rate hovered in the 4.75-5 per cent range. That liquidity was ample was evident from the average daily repo subscriptions—at Rs 17,162 crore it was nearly twice of what it was the previous week. The average daily volumes in the debt market also increased by 43 per cent (Rs 6,136 crore) compared to the previous week.

In the forex markets, the rupee continued to gain strength, ending the week with a gain of 19 paise. As a result, the FIEO has urged the apex bank to intervene and help the rupee stabilise vis-à-vis the dollar. A constant appreciation of the rupee has hurt exporter earnings. Meanwhile, India's foreign exchange reserves rose from $81.6 billion the previous week to touch $82.4 billion, as on June 13, 2003.

In the coming week much will depend on the decision about the US Fed rate cut. Hence, the sentiment is likely to be bullish and bond markets will continue to rally if the Fed rate cut happens, provided there is comfortable liquidity.