It was another week of small movements in the bond markets. The ten-year government security (GOI 2013, 7.27%) closed the week at 5.16 per cent, down by four basis points over the week. Volumes, however, showed an increasing trend throughout the week and the average trading volumes at Rs 3641.85 crore were 30 per cent higher than in the previous week. There were a number of positive developments last week, which should augur well in the medium- to long-term.
Sentiment was boosted by less-than-expected outflows from the banking system on account of advance tax payments and hopes of large inflows from the government to state-run pension schemes, which are also large investors in the bond market. This was also seen in the average daily subscriptions at the RBI's daily repo window, which stood at a healthy Rs 26,506 crore. The call rate continued to move in a band under the repo rate of 4.5 per cent.
On Tuesday Standard & Poor's upgraded India's long-term foreign currency rating outlook to stable from negative. This was largely due to the improving external finances. The revision should ensure that India would be an even more attractive destination for foreign flows, and to that extent it will provide a push to these flows. S&P has, however, retained negative outlook on India's local currency rating citing the government's inability to address fiscal problems and structural reforms.
The impact of the ratings upgrade was felt in the currency markets. The Indian rupee continued its winning spree gaining four paise over previous week. The rupee is now up nearly 5.4 percent against the dollar since January.
After taking a break last week, inflation once again continued its upward march. For the week ending December 6 the wholesale price-based inflation stood at 5.38 per cent. This marked the fourth successive week of rising inflation. Unlike some of the earlier weeks, this failed to spook bond market participants. The bond market had expected inflation of 5.4 per cent and lower than anticipated figure was welcome. Comments by RBI governor Y. V. Reddy that he saw no need to revise the inflation outlook despite a rise in global oil prices also buoyed sentiment.
Outlook
Easy money conditions and expectations of lower inflation should ensure that bond prices do not fall sharply. Buying activity is also expected to resume in January, as state-run banks are flush with funds and the auction of Rs 5000 crore of medium-term government paper is scheduled.
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