It was an excellent week for the Indian bond market. The daily average trading volume surged to Rs 5,330 crore -- a rise of nearly 60 per cent over the previous week. And the yield on the 10-year benchmark (GOI 2014, 7.27%) fell 4 basis points to close the week at 5.20 per cent on Friday - the lowest level in the past month. In fact, the 10-year yield has continuously fallen in the last ten trading sessions. Reasons: huge liquidity, fall in inflation number and the government's assurance that the market stabilisation bond would not be issued in March.
In the corporate bond market, the yield on the 5-year benchmark corporate bond dipped to 5.67 per cent -- a fall of 16 basis points over the week. And its spread over the government bond of the same maturity narrowed by two basis points to 85 basis points over the previous week.
On Friday, the government's expenditure secretary, D Swarup confirmed that the sale of market stabilisation bonds would begin only in the first quarter of the fiscal year starting in April 2004. This cleared the overhang uncertainty over the issue of these bonds and the fact that there would be no RBI intervention before March 31 buoyed market sentiment. The market stabilisation bond will be issued to contain surplus liquidity in the market, which has been on a continuous rise following strong dollar inflows.
The liquidity in the market touched a new high this week. On two consecutive days - Tuesday and Wednesday - the daily subscription to RBI repos crossed Rs 50,000 crore for the first time in history. Over the week, the daily average stood at Rs 49,368 crore - the highest weekly average subscription to RBI repos. And since there was not much demand for funds in the market, the call rate too remained below the repo rate of 4.5 per cent this week.
One of the reasons for the excess liquidity has been the good FII investment in the ongoing public offerings of PSU companies in the equity market. Some bond redemption due at the end of March is further expected to infuse more liquidity in the market.
Due to the strong dollar inflow, the rupee touched a 43-month high of Rs 45.23/$ on Wednesday. However, with RBI intervening in the following days, the rupee closed the week at Rs 45.26/$ -- a gain of 3 paise over the previous week.
But, the biggest relief was provided by the sharper than expected fall in the inflation number. The inflation based on Wholesale Price Index fell to 5.32 per cent for the week ended February 28 against 5.94 per cent in the previous week. This further helped in lifting the bond market sentiment.
Outlook
In the past three weeks, the yield on the 10-year benchmark has came down dramatically from 5.31 per cent to 5.2 per cent. This trend is likely to continue in the coming week amid surplus liquidity and a sharp drop in inflation. Moreover, with RBI's intervention being ruled out for the month, the bond market is poised for a decent week ahead.
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