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A Flat Week

Bond markets remained range-bound as the RBI rolled out its market stabilisation bonds. Inflation has shot up again and any news on a hike in the US Fed rate could guide sentiment.

It was a flat week for Indian bond markets as yields remained range-bound. The benchmark ten- year government security (GOI 2014, 7.37%) ended the week at 5.11 per cent—one basis point lower than the previous week's close. All attention was focused on the issue of stabilisation bonds by the central bank.

Volumes were, however, on the upswing with daily average trading volumes at Rs 7,516 crore. Some of the higher volumes were attributed to banks building up their portfolios at the start of the new fiscal year.

There was an element of uncertainty in the market on Monday as the US economy reported stronger than expected job growth on Friday. US government securities were quick to react and registered their sharpest ever rise in yields in the last five years. This triggered fears of a quicker than expected rate hike by the US Federal Reserve. As a result, the benchmark yield hardened to 5.13 per cent. Finance Minister Jaswant Singh's statement to Reuters that there was no fear of interest rates rising for the moment assuaged sentiment and kept yields in check.

The element of uncertainty also arose on account of RBI Deputy Governor Rakesh Mohan's statement that "RBI would seek an upward revision in the MSS's Rs 600 billion ceiling once the outstanding amount under the scheme reached a trigger point of Rs 500 billion." Benchmark yields thus remained at 5.13 per cent on Tuesday as well.

On the last two days of trading, yields came down off their highs. Friday's fall in yields came on account of lower-than-expected cut-off price at the central bank's sale of market stabilisation bonds, which resulted in profit booking.

Inflation rose to 4.47 per cent for the week ending March 27, 2004. This was 17 basis points higher than the previous week's level and was primarily on account of costlier food, manufactured products and electricity. As this figure came in on a day when bond markets were closed, its impact will only be felt next week.

On the currency front, the hectic pace of rupee appreciation against the dollar slowed down. The rupee closed at Rs 43.63/$.

Outlook
Rupee inflows on account of RBI's forex intervention still remain high. There were expectations that lower inflation numbers would have driven yields lower. These expectations have, however, been belied and volatility can be expected on this account.