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Good Times Continue

Bonds continue to gain for the fourth straight week. Comfortable liquidity, a sharp fall in inflation and US Fed's decision to keep interest rates unchanged resulted in the 10-year yield falling to 5.16 per cent.

It was another good week for the Indian bond market. The yield on the 10-year benchmark (GOI 2014, 7.37%) fell to a seven-week closing low of 5.16 per cent on Friday -- down 0.04 per cent over the week. There were three major reasons for this -- high liquidity, unchanged US interest rates and a sharp fall in inflation. Also, last week's news that the government's threatened market stabilisation bonds would not be issued in this fiscal also kept the markets cheerful.

In the corporate bond market, the yield on the 5-year benchmark bond fell 0.06 per cent to close at 5.61 per cent. And its spread over government bonds of the same maturity narrowed by four basis points to 81 basis points over the previous week.

On Tuesday, the US Federal Reserve kept the interest rate unchanged at a 46-year-low of 1 per cent. The Fed reiterated that it can "be patient in removing its policy accommodation." The message from the central bank is that interest rates are unlikely to change in the near future. As a result, the yield on the 10-year US Treasury note fell from 3.76 per cent to 3.69 per cent -- an eight-month low. This also strengthened the Indian market's expectation that the domestic interest rate is unlikely to move upward in the near term.

The biggest trigger was provided by the sharper than expected fall in inflation. The inflation based on Wholesale Price Index fell to a six-month low of 4.91 per cent for the week ended March 6 as against 5.32 per cent in the previous week. This is a good sign for the Indian bond market as high inflation in recent months has been daunting the bond investors.

In the past four weeks, the yield on the 10-year benchmark has fallen by 15 basis points. Excess liquidity has been one of the key reasons for the same. This week too, the daily average subscription to RBI repos remained high at Rs 47,505 crore. In fact, on Tuesday, this figure touched Rs 55,045 crore – the highest ever. And as there has been very little demand for funds in the market, the call rate too remained below the repo rate of 4.5 per cent.

The rupee touched a 43-and-half month closing high of Rs 45.16/$ on Friday – a gain of 10 paise over the week. This was largely on account of huge forex inflows and limited RBI intervention. Meanwhile, India's forex reserve moved up to $109.596 billion as on March 12 from $109.13 billion in the previous week.

Outlook
Comfortable liquidity and low inflation should keep the bond market in good shape in near term. But a lot will depend on the government's borrowing calendar for the next financial year, which is expected to be announced in the coming week.