VR Logo

Stable Markets

In a low trading week, bonds hardly made any move. Though inflation continued its rising tend, comfortable liquidity kept bond yields in check. The rupee touched a 10-week high following a rating upgrade by Moody's and Fitch.

Indian bond markets remained stable despite a rise in inflation. Inflation rose for the ninth straight week to touch a 39-week high of 6.21 per cent for the week ended January 10, 2004. This sharp rise in inflation is a cause of concern for the bond market and is preventing yields from falling. On the other hand, ample liquidity in the market has prevented yields from rising. Net-net, the yield on the 10-year benchmark (GOI 2014, 7.37%) remained unmoved at 5.14 per cent. The daily average trading volumes dipped by 13 per cent over previous week with an evident lack of enthusiasm in the market.

A finance ministry official said that the rate could start falling by the end of the month, but his comments hardly made an impact. The market also remained unmoved by Y. V. Reddy's reiteration that inflation forecast for March-end remained unchanged at 4-4.5 per cent. Inflation is likely to move up further following the government's intention of imposing an additional cess on fuel products.

Following reduction in external vulnerability, rising forex reserves and a vibrant economic growth, two international rating agencies have revised their outlook on India. While Moody's upgraded India's long-term foreign currency rating from Ba1 to Baa3, Fitch has upgraded it from BB to BB+. Consequently, the rupee closed at a 10-week high of Rs 45.35 against the dollar on Friday -- a gain of 6 paise over the week. However, this failed to bring any cheer in the Indian debt market due to the rise in inflation.

But these re-ratings will definitely help in increasing foreign capital inflows, which in turn would increase liquidity in the market. This week, liquidity in the debt market remained comfortable. The daily average subscription to RBI repos stood high at Rs 24,584 crore. The call rate too remained below the repo rate of 4.5 per cent.

Though the yields at the medium- and the long-end of the maturity spectrum are hardly making a move, yields at the shorter end are on a rise. For instance, the yield on the 5-year GOI security rose by 4 basis points last week, while the yield on the 10-year paper hardly moved. Consequently, the spread between the 5-year and 10-year GOI security narrowed to 25 basis points against 28 basis points in the previous week.

Moreover, RBI had lowered the cut-off price at its fortnightly auction of 364-day treasury bills resulting in the yield rising to 4.40 per cent from 4.39 per cent in the previous fortnight. However, the yield on the 91-day treasury bills has been kept unchanged at 4.26 per cent.

Outlook
Except for the rise in inflation there are no other negative factors in the market. Unless inflation shows some sign of declining, bond yields are expected to remain at current levels. However, RBI may come out with an OMO announcement ahead of the fresh auction scheduled in the first week of February, following excess liquidity in the market.