While last week, the US Fed dampened the sentiment in the Indian bond market, this week it was the Bank of England that played spoilsport. On Wednesday, Bank of England hiked its key base rate by 25 basis points from 3.75 per cent to 4 per cent. The Indian bonds initially snapped a four-day fall in yields when the government, in its Interim Budget, announced a lower-than-expected borrowing target for the next financial year. As a result, the yield on the 10-year benchmark (GOI 2014, 7.37%) after dipping to 5.16 per cent on Wednesday, went up to 5.21 per cent on Friday – up one basis point over the week.
On February 3, the finance minister Jaswant Singh presented the Interim Budget in the Parliament. He has lowered the forecast for the fiscal deficit for 2003-04 to 4.8 per cent of GDP as against the budgeted 5.8 per cent, and the revenue deficit to 2.9 per cent from 3.4 per cent projected earlier. On the other hand, the finance minister has projected a higher GDP growth of 7-8 per cent for 2004-05. Lower deficits and the lower borrowing target set for the next year helped in bringing most of the bond investors back in the market. The average trading volume in the Wholesale Debt Market surged by 11 per cent over the week to Rs 3,046 crore. But this is still low as compared what it used to before November 2003.
Inflation, however, came down by just one basis point to 6.12 per cent for the week ended January 24 from 6.13 per cent in the previous week. As this fall was far less than what the market expected, the sentiment remained cautious. Moreover, the postponement of the Rs 5,000-crore, 20-year bond auction by a fortnight also failed to cheer the market. As per the borrowing calendar, the auction was scheduled for the period February 2-9, but it will now take place in the period February 23-27. The RBI will also hold a tap sale of nearly Rs 4,300 crore for 18 states in the third week of February.
Despite the rise in volatility in the Indian bond market, liquidity has remained comfortable in the recent weeks. In fact, in the week gone by, the average subscription to RBI repos touched an all-time high of Rs 41,634 crore – up 22 per cent over the previous week. Consequently, the call rate too remained below the repo rate of 4.5 per cent over a large part of the week. On Friday, however, the call rate fell to 3.25-3.75 per cent due to a lack of demand for funds by banks.
The rupee continued to gain against the US dollar for the fifth straight week. Driven by consistent dollar inflows and the low demand for dollar, the rupee gained 2 paise over the week to close at Rs 45.28/$ on Friday.
Outlook
The rise in global interest rates and a high inflation in India are keeping the Indian bond investor on their toes. However, lower borrowing target for the next fiscal, the postponement of the scheduled auction and high liquidity should keep the bond markets in check.
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