It was the third consecutive good week for the Indian bond markets. The yield on the 10-year benchmark (GOI 2013, 7.27%) declined by 4 basis points over the week to close at 5.12 per cent -- the lowest level in December. With this fall, the yield on the benchmark has come down by 9 basis points since it hit a high of 5.21 per cent on December 5, 2003.
Inflation continued to rise for the fifth straight week. But RBI Governor Y. V. Reddy's comment that he saw no change in the inflation outlook and his expectation of the inflation rate to end 2003-04 as targeted (4.0-4.5 per cent) did the trick. The inflation based on Wholesale Price Index climbed to 5.57 per cent for the week ended December 13 from 5.38 per cent in the previous week. Inflation is expected to fall due to lower farm prices in the coming weeks due to good harvest and a higher base in previous year.
Moreover, comfortable liquidity and the expectation that pension funds and banks will increase investments in the debt market in 2004 helped in restoring investors' confidence. The daily average subscription to RBI repos stood at Rs 27,600 crore – up nearly 4 per cent over the previous week. The call rate too remained below the repo rate of 4.5 per cent throughout the week indicating ample liquidity in the system.
Market sentiment was also boosted by the weekend news that India's forex reserves have crossed $100 billion for the first time. India's foreign exchange reserves rose to $100.049 billion in the week ended December 19. Liquidity in the market has been increasing steadily due to RBI's regular purchase of dollars in order to stop the rupee from appreciating further. The rupee, however, closed at Rs 45.58/$ on Friday -- down 7 paise over the week.
Though yields fell across the board, the fall was more severe on the longer-maturity bonds, thus making the yield curve slightly flat compared to previous week. For instance, the spread between the 5-year and 15-year bond declined to 0.84 basis points against 0.88 basis points in the previous week. The spread between the 10-year and 15-year bond squeezed to 0.45 basis points vs previous week's spread of 0.48 basis points.
The bullish market sentiment was also reflected in a higher daily average trading volume, which crossed the Rs 4,000-crore mark after a gap of six weeks. Trading volume was also 10 per cent higher than previous week's volume of Rs 3,642 crore.
Outlook
RBI governor's favourable comments have helped in restoring investors' faith in the markets despite a rise in inflation. Liquidity is also comfortable owing to increasing forex inflows. Further, the expectation of higher investments by pension funds and banks in the New Year should keep the markets in good stead. Thus, the outlook seems positive for bond fund investing.
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