It was an another good week for the bond market. Abundant liquidity and increasing hope of a bank rate cut in the forthcoming monetary policy (to be announced on November 3, 2003) continue to prop up bond prices. But the last minute announcement of Rs 11,000 crore open market operation (OMO) on Thursday led to a minor correction on the last trading day. As a result, the yield on the 10-year benchmark (GOI 2013 7.27%) after touching a low of 5.04 per cent on Thursday ended the week at 5.06 per cent on Friday – down 0.10 per cent for the week as a whole.
The expectations of a bank rate cut got further intensified after RBI's deputy governor Rakesh Mohan's statement that there are no inflationary pressures. The recent higher inflation figures were mainly due to relatively low prices at the same time last year due to weak demand. Meanwhile, the annual wholesale inflation rose to 5.03 per cent in the week ended September 27, – up from 4.72 per cent in the week ended September 20, 2003.
On Friday, the RBI conducted an OMO of Rs 11,000 crore to check liquidity and the falling yield. In the OMO, RBI auctioned 6-year bond for Rs 5,000 crore and another 20-year bond worth Rs 6,000 crore. Both the issues got good response reflecting ample liquidity in the market.
In a short span of two weeks, the yield on the 10-year benchmark has slipped nearly 20 basis points (0.20 per cent). However, this week, the fall has been sharper in the medium-to-long end of the maturity spectrum, thus making the yield curve slightly flat. Consequently, the spread between 5-year and 10-year bond narrowed to 0.39 per cent as against 0.43 per cent in the previous week. Similarly, the spread between 5-year and 15-year bond narrowed to 0.77 per cent vis-à-vis 0.80 per cent last week.
The key trigger in the bond market has been the government's low borrowing target for the second half of 2003-04 and surplus liquidity due to strong forex inflows. This ample liquidity was widely reflected in a high average daily subscription to RBI repos -- Rs 22,300 crore. The call rate too remained below the repo rate of 4.5 per cent throughout the week.
The rupee ended the week almost flat at Rs 45.39/$ on Friday. Meanwhile, India's forex reserves fell to $87.74 billion in the week ended October 3, 2003 from $89.33 billion in the previous week. This was largely due to the redemption of Resurgent India Bond (RIB) during the week. But the net fall in reserves is not as big as the redemption amount of RIB was, thus, reflecting the fact that there have been forex inflows in the week as well.
Outlook
The further rise in bond prices is expected at a slower pace following the Rs 6,500 crore of state government bond auction due in the coming week and a schedule auction of Rs 5,000 crore between October 16-22. Though RBI is comfortable with current high inflation, the market is eagerly looking forward to November 3 – the day RBI will announce the mid-term monetary policy.
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