It was another bad week for the bond market. Though inflation came down for the eighth consecutive week, the open market operation (OMO) and the concern over advance tax outflow due next week resulted in the fall in bond prices. However, bargain hunting at lower levels led to some increase in bond prices in the last trading session. Consequently, the yield on the 10-year benchmark GOI security (2013, 7.27%), after touching a high of 5.34 per cent closed, at 5.32 per cent on Friday – up 0.4 per cent over the week.
On Monday, RBI conducted an OMO of 16-year bonds worth Rs 5,000 crore. It also sold the 10-year state government loans worth Rs 955 crore for three states – Maharashtra, Madhya Pradesh and West Bengal. Both the state loans and OMO were oversubscribed. However, the lower cut-off price set in the OMO dampened the market sentiment. The cautious sentiment was also reflected in the low trading volumes on Monday – Rs 2,230 crore as against the daily average of Rs 4,500 crore in the past two weeks. However, bottom fishing in the last two trading sessions resulted in a higher trading volumes of nearly Rs 6,000 crore.
Both the auctions resulted in some liquidity tightening in the market. The daily average subscription to RBI repos came down to Rs 16,000 crore – down 40 per cent from last week. The call rates remained below the repo rate of 4.5 per cent throughout the week. However, liquidity could squeeze further following the advance tax outflow of Rs 8,000-10,000 crore due next week. Moreover, banks could book profits before their half-yearly account closure on September 30, 2003.
Though prices fell across the board, the magnitude of fall was large in the 5-15 year segment. Here, prices fell by 50-90 paise. In contrast, the yield on the 91-day T-bill fell to 4.63 per cent this week from 4.67 per cent in the previous week. Consequently, the spread between 364-day T-bill and the 5-year government bond rose to 0.32 per cent against 0.23 per cent last week. Thus, the yield curve has become a bit steeper now.
In the currency market, the rupee touched a three-year high of Rs 45.70/$ on Thursday, mainly driven by foreign funds. But some FII outflow, export cancellation and the expectation of weaker rupee in the coming weeks due to the redemption of Resurgent India Bond (RIB) resulted in the fall in rupee value on Friday. It finally closed the week at Rs 45.82/$ – a gain of 5 paise over the previous week. However, the rupee is expected to gain over the long-term due to increasing foreign fund inflows and good growth in exports. Meanwhile, India's forex reserve rose by $ 1.1 billion to reach US$ 87.37 billion in the week-ended September 5, 2003.
Outlook
The market is expected to remain range-bound ahead of the advance tax outflow. That apart, the uncertainty over the impact of RIB redemption worth $5.5 billion due for this month-end is also weighing on the market. While liquidity is good, the market is still cautious and is waiting for some direction from the new RBI governor Mr Y. V. Reddy.
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