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A Flat Market

While liquidity continued to rule high, bond prices moved in a narrow range. Since Bimal Jalan has once again ruled out a repo rate cut in the immediate future, bond prices are likely to remain range-bound. The inflation number will be key next week.

This week the Indian bond markets didn't witness much excitement. Initially, the fear of an open market operation by the apex bank, fading hopes of a repo rate cut in the near-term and concerns over the likely rise in inflation kept market players at bay. This led yields to move upwards during mid-week. However, later in the week, as the Reserve Bank of India (RBI) announced the scheduled auction of Rs 9,000 crore for next week, the fear of OMO was nipped in the bud. This lifted market sentiments somewhat and yields slipped down, albeit marginally. Overall, the yield on the 10-year benchmark GOI Security (9.81%, 2013) ended the week unchanged at 5.71 per cent on Friday.

Though there was a slight improvement in the daily average trading volumes over the previous week, it is still low as compared to what it used to be a couple of months ago. The market players have become cautious due to lack of direction in terms of the interest rate movement and the inflation numbers. On Thursday, the RBI governor Bimal Jalan once again reiterated that the central bank had no plans to reduce the repo rate, at least for now. Inflation, on the other hand, is also expected to remain above 5 per cent due to rise in food prices. For the week-ended June 21, inflation had risen from 4.97 per cent the previous week to 5.21 per cent. The central bank has forecasted inflation to be in the 5-5.5 per cent range by end-March 2004.

The liquidity in bond markets has been the key driver of bond prices recently. But that too hasn't helped the market much. This week the daily average subscription to the repo auction rose by nearly 33 per cent to over Rs 30,000 crore—the highest in the last nine weeks. The lack of demand for money was also reflected in the call rate, which hovered in the 4.25-4.75 per cent range on Friday, as most banks had met their reserve requirement ahead of the reporting Friday. However, next week's scheduled auction of Rs 9,000 crore could tighten liquidity though marginally. The central bank will re-issue the 6.35 per cent 2020 bond for Rs 6,000 crore and the 7.95 per cent 2032 bond for Rs 3,000 crore on July 15.

The rupee continued to gain this week too and ended the week at Rs 46.07/$ on Friday—a gain of 27 paisa over the week. Exporter remittances and foreign capital inflows largely contributed to this. The dollar purchase by state-run banks, which have been intervening on the behalf of the RBI recently, were occasional. Meanwhile, India's forex reserves rose from $81.905 billion a week ago, to touch $82.774 billion in the week-ended July 4, 2003

Interestingly, on Friday, the RBI said that the multi-billion dollar redemption of SBI's Resurgent India Bonds, slated for October would not have any impact on foreign exchange reserves. To cater to this, the apex bank has bought $4.2 billion of foreign currency in the forward market to meet the outflow (value of the redemption is estimated at $5.5 billion, including interest). This has dual benefits: a) the forex reserves level will not be adversely affected; and b) the rupee released by RBI when the forward purchases fall due will ensure adequate liquidity in the market. The SBI raised $4.2 billion in 1998, through RIBs, from NRIs to increase the country's external finances after the US and other developed countries slapped sanctions against India in response to India carrying out nuclear tests.

Outlook
In absence of a clear direction on interest rates, bond prices are likely to move in a narrow band. The inflation numbers will be key next week. That apart, due to abundant liquidity the scheduled auction of Rs 9,000 crore is expected to receive a good response. The swelling capital inflows will help the rupee maintain its upsurge in the short-term despite the greenback's gains against other major currencies.