The Indian bond market continued its gaining streak for the fifth straight week. Initially, excess liquidity boosted bond prices and the yield on the 10-year benchmark (GOI 2014, 7.37%) dipped to 5.15 per cent. But this was short lived as this excess liquidity raised the possibility of an open market operation by RBI. As a result, the yield climbed to 5.18 per cent on Wednesday. But as the government announced a lower borrowing target for the first half of next fiscal and the inflation also came down, bonds once again rallied and the yield dipped to 5.16 per cent by Friday -- down one basis point over the week.
On Thursday, the government came out with the borrowing calendar for the first half of 2004-05. According to this, the government would raise Rs 59,000 crore in the first half of the next financial year. In addition, it will sell Rs 35,500 crore of bonds and treasury bills under the market stabilisation bond in the first quarter. The market stabilisation bond is aimed to manage excess liquidity in the system, which is on a rise due to RBI's currency market intervention.
Though the government's borrowing plan is 27 per cent lower than this year, the amount to be raised under the market stabilisation bond is on the higher side. This could be a cause of concern for the market. Of the Rs 60,000 crore set for the market stabilisation bond, nearly 60 per cent will be issued in the first quarter itself. However, on Friday, RBI deputy governor Rakesh Mohan said that the ceiling of Rs 60,000 crore on the issue of market stabilisation bond was open to revision.
That apart, the RBI has decided to introduce 7-day fixed rate repos as part of the liquidity adjustment facility (LAF) with effect from March 29. The existing system of daily repo auctions will continue till April 2. The RBI holds daily repo and reverse repo auctions currently to absorb or pump in money (as the case may be) in the market. It has also decided to lower the spread between the repo and reverse repo rates to 150 basis points from 200 basis points earlier.
All these measures have been introduced to contain excessive liquidity in the market. Owing to surplus liquidity, RBI has been receiving excessive bids at the repo auctions. This week, the daily average subscription to RBI repos touched a new high of Rs 51,263 crore.
Liquidity has been rising due to huge forex inflows. This has led the rupee to gain 63 paise this week to close at a 46-month high of Rs 44.53/$ on Friday – the highest weekly gain in over six years. Earlier, RBI had been mopping up dollars to maintain the exchange rate, but this week it refrained from market intervention, leading to an appreciation in the rupee.
A sharp drop in inflation also helped in strengthening sentiment. The inflation based on Wholesale Price Index fell for the third straight week to 4.78 per cent for the week ended March 13, 2004 against 4.91 per cent in the previous week.
Outlook
In the coming week, RBI will issue bonds worth Rs 5,000 crore under the market stabilisation scheme. But as it will be of a short tenure (one-two years), the market is likely to digest it comfortably. The lower government borrowing target and the fall in inflation has helped in improving market sentiment. Thus, in absence of any uneven development, the bond market is well poised for a good week ahead.
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