The tug-of-war between inflation numbers and RBI's expectations continued with the former gaining the upper hand. After a gap of 35 weeks, inflation crossed the 6 per cent mark to close at 6.09 per cent for the week ending January 3, 2003. A year ago, the corresponding figure stood at 3.78 per cent. The main contributors to the increase in the Wholesale Price Index were fuels and some commodities like steel. With this increase the real interest rates across the range of maturities has turned negative.
Nonetheless RBI Governor Y. V. Reddy maintained that though inflation was currently "ruling high", it should start falling and was expected to be in the 4.0-4.5 per cent range by end-March. These comments were welcomed by bond market participants, and the benchmark ten-year government security (GOI 2014, 7.37%) closed at 5.14 per cent, off its intra-day high. Over the course of the week the benchmark yield has thus gained 2 basis points.
Trading activity was, however, on the lower side. Volumes in the wholesale debt market at Rs 2767 crore, were lower by 35 per cent over the previous week. Liquidity remained comfortable with average daily subscriptions at RBI repo auction at Rs 29,820 crore. This was, however, 23 per cent lower than that in the previous week. The call rate also remained below the repo rate ranging between 4.4 and 4.5 per cent.
Bond markets were off to a nervous start as the RBI set the cut-off yield at its auction of 10-year bonds issued by Maharashtra at 6 per cent. This was, at least, 20 basis points higher than expected. The higher than expected weighted average was reported to have induced some selling from traders, banks and mutual funds resulting in the ten-year paper losing 16 paise over previous close.
Sentiment was however soothed the next day as the central bank set a coupon of 5.90
per cent on the state government 2017 bonds auction, which is expected to raise Rs 800 crore on January 19. The next few trading sessions remained comfortable with trading volumes inching higher. The week ended with the release of inflation numbers, which briefly ruffled the bond market.
In the currency market, the rupee gained 3 paise over the dollar to close at 45.42/$. With public sector banks stepping up buying, gains were much less than those seen in the previous week
Outlook
There will be an outflow of funds from the system on Monday as the RBI is set to carry out a Rs 800-crore state government paper auction. This will be keenly watched for its impact on system liquidity. Inflation numbers will also play a major role in setting the direction for bond markets.
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