It was one of the quietest weeks in the bond market in recent times. The yield on the ten-year government security (9.81%, 2013) closed every day at 5.71 per cent except on Thursday when yields inched up to 5.72 per cent. Over the week, the yield on this paper thus remained unchanged. The new 10-year benchmark GOI security (7.27%, 2013) also had an uneventful week. It also remained static throughout the week to close unchanged at 5.70 per cent.
The static yields were, however, accompanied by a sharp fall in volumes, as hopes of a repo rate cut seem to have disappeared. Average daily volumes on the Wholesale Debt Market fell by 15.5 per cent over the past week. At Rs 3819.25 crore, weekly average trading volumes have been at the lowest level since April 2003. It was only in the last week of March 2003 that trading activity in the bond market was more subdued.
Disappointment with the inflation numbers also contributed to the stagnation in yields and sliding volumes. For the second successive week, inflation continued its upward climb ending at 5.32 per cent for the week ended June 28, 2003.
There was also some tightening of liquidity due to the outflow of Rs 9,000 crore during the week. The RBI re-issued a 17-year bond mopping up Rs 6,000 crore and issued a 29-year bond collecting Rs 3,000 crore. Consequently, the daily average subscription to the repo auction fell by 14 per cent to Rs 25,732 crore. While bond markets remained listless there was a series of announcements by the monetary authority in the middle of the week.
On Thursday, the RBI announced that the interest payable on non-resident rupee deposits would be fixed at 2.5 per cent above LIBOR deposits. Before this move, NRE deposits offered returns of as high as 5.5 to 6 per cent.
Clearly, this step is aimed at curbing the inflow of arbitrage money into non-resident (external) deposits. According to RBI data, these repatriable deposits, denominated in rupees, have contributed to $966 million of inflows in April. After weeks of denying that short-term flows had anything to do with the build-up of reserves, the central bank finally seems to have conceded this. Bond prices fell on news of this announcement, as there were concerns that it would have a short-term impact on liquidity. The ten-year GOI security (9.81%, 2013) closed higher at 5.72 per cent, while the new benchmark GOI security (7.27%, 2013) inched up to close at 5.71 per cent.
While on one hand the RBI moved in to reduce the arbitrage opportunity, on the other hand it showed its comfort with the increasing forex reserves, which touched $83 billion on July 11. The central bank hiked the remittance limit on several current account transactions 20-fold to $100,000. These transactions include remittances for education, employment abroad, emigration and maintenance of overseas relatives. Corporates will now be allowed to remit upto $ 1 million towards consultancy services procured abroad. In comparison, the current limit is $ 100,000.
Keeping pace with the RBI's announcements, the government also laid down the guidelines for buyback of high coupon bonds from banks. The government will buy back 19 securities worth Rs 1,00,438 crore from banks on July 19 at a minimum discount of 7.5 per cent to the target premium on these securities. The government will reissue four existing securities 6.65% 2009, 6.72% 2014, 7.46% 2017 and 6.25% 2018, and these will be switched with the high coupon securities held by banks and financial institutions.
After six weeks of continuos appreciation against the dollar, the rupee lost some ground this week closing lower by 15 paise against the dollar.
Outlook
As hopes of a repo rate cut die out in the short-term, inflation data to be released on Sunday will give direction to the market.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
