The bond markets were listless this week. Despite the auction outflow of Rs 12,000 crore, liquidity remained comfortable. But with Reserve Bank of India not showing any urgency to cut the repo rate, bond yields moved in a narrow range. Overall, the yield on the 10-year benchmark government security (2013, 9.81%) ended the week at 5.71 per cent – down 0.02 per cent over the week.
RBI Governor Bimal Jalan said on Friday that there was no urgency for a repo rate cut and reiterated that the soft interest rate bias would continue. He further added that the apex bank is waiting for greater clarity on the inflation numbers and the progress of the monsoon. Jalan's statement resulted in bond yields firming up during the closing hours on Friday. Inflation has, in fact, declined to 4.9 per cent for the week ended June 14, 2003 from 5.05 per cent in the week ended June 7, 2003.
On Tuesday, RBI auctioned an 11-year bond issue of Rs 5,000 crore, a 16-year bond issue of Rs 4,000 crore and a 25-year bond issue of Rs 3,000 crore. All the three bonds were heavily oversubscribed confirming the fact that the fund supply in the market is very high. In all, the RBI received bids worth Rs 27,645 crore — one of the highest bids seen in bond auctions in recent times.
Due to ample liquidity, call rates hovered below the repo rate of 5 per cent during most trading sessions. The average daily subscription to RBI repos also remained high – about Rs 22,600 crore. Moreover, there was an inflow of Rs 4,600 crore in the system this week by way of interest payments and redemption of government securities, which further added to the liquidity. The average daily trading volume fell by 22 per cent this week over previous week.
The liquidity in the system has been increasing because of higher dollar inflows and the subsequent dollar purchases by the RBI in the currency market. This has also resulted in an appreciation of the rupee for the last few months. This week, the rupee gained 6 paise to close the week at 46.34/$. In fact, the rupee touched an intra-day high of Rs 46.33/$ on Friday, but the central bank's intervention helped it check the gain.
The rupee has gained despite S&P's re-affirmation of the junk status of India's BB+ local currency sovereign rating. S&P has also reaffirmed the BB foreign currency rating. It has also maintained a negative outlook for India reflecting continuing difficulty of the government in addressing fiscal problems and structural reforms.
Outlook
With little prospects of a repo rate cuts in the near future, yields are likely to stay range-bound in the coming week as well. Moreover, with no scheduled auction in the coming week, there is a possibility that the RBI may intervene to check excess liquidity, which could affect bond prices.
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