What an excellent week it was for the Indian bond market! The yield on the 10-year benchmark (GOI 2014, 7.37%) continued its declining trend for the sixth straight week to close at 5.12 per cent – down 4 basis points over the week. Abundant liquidity, an unbelievable GDP growth of 10.4 per cent in the quarter ended December 2003, and a much sharper fall in inflation were the key triggers this week.
Another thing that came in limelight this week was the strong appreciation of rupee against the dollar. On Wednesday, the rupee touched a 4-year high of Rs 43.65/$, largely driven by huge foreign inflows and rare RBI intervention. Hopefully, the main reason for RBI's non-intervention in the currency market was to bring down inflation by reducing liquidity. Liquidity in the debt market as represented by daily average subscription to RBI repos stood at Rs 37,747 crore – a fall of 26 per cent compared to previous week. However, call rate remained below the repo rate of 4.5 per cent over the week.
Finance Minister Jaswant Singh said that he saw a relationship between a stronger rupee and inflation management. And this turned out to be true, as the inflation based on the Wholesale Price Index fell to 4.3 per cent for the week ended March 20, 2004 from 4.78 per cent in the previous week. And post fall in inflation, RBI intervened in the currency market resulting in a minor correction in the rupee. The rupee finally closed the week at Rs 43.74/$ on Friday with an overall gain of 80 paise over the week.
This week, RBI also introduced DVP-III, which allows netting of government securities transactions. Prior to this, investors were only allowed to sell bonds, which are in their possession. This new system is expected to increase trading volumes in the debt market. This week, the daily average trading volume surged to Rs 50,242 crore – a rise of 26 per cent over previous week.
The coming week will mark the expiry of single day repo and will be replaced by 7-day and 14-day repos. That apart, RBI will also issue a slew of short maturity securities, including treasury bills under the market stabilisation scheme, thus increasing supply of short-term instruments. This, in turn, may result in the yield curve becoming flat, as it happened this week. At the week's T-bill auction, the yield on the 91-day and 365-day T-bills rose by 12 and 13 basis points respectively, resulting in the flattening of yield curve.
Outlook
On Tuesday, RBI will issue one-year bonds again amounting to Rs 5,000 crore, followed by the auction of Rs 1,500 crore worth treasury bills on Wednesday under the market stabilisation scheme. Both these issues are expected to sail through comfortably, thanks to comfortable liquidity. The fall in inflation has already buoyed market sentiment, and if it sustains at the current level, the bond market is poised for a good week ahead.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
