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Bonds Make Gains

In a high trading week, Indian bonds made smart gains. Cancellation of bond auction, rise in liquidity and fall in inflation led the yield on the 10-year benchmark bond to close at the year's low of 5.08 per cent.

A sharp rise in liquidity, the cancellation of bond auction scheduled for April and the fall in inflation helped Indian bonds in registering smart gains. Even the higher than expected yield set in the 365-day T-bill auction under the Market Stabilisation Scheme (MSS) failed to annoy the market. Overall, the yield on the 10-year benchmark, (GOI 2014, 7.37%) fell by 4 basis points over the week to close at 5.08 per cent on Friday – the lowest level in 2004.

In the corporate bond market, however, the yield on the 5-year benchmark after dipping to 5.45 per cent initially, closed at 5.47 per cent – a fall of just a per cent over the week. Consequently, the spread between the yields on 5-year corporate bond and that on the 5-year government bond widened to 73 basis points this week from 69 basis points last week.

The most striking event of the week was the cancellation of April's scheduled auction of Rs 5,000 crore. The market was expecting such a move following RBI's announcement of state government bond auction of Rs 6,500 crore for April 21. Another reason for this cancellation was the government holding a surplus account with the RBI under the ways and means advances (WMA). According to Expenditure Secretary D Swarup, this surplus figure stands at Rs 15,000 crore, which means that the government doesn't need to borrow money at least for now.

The Expenditure Secretary also said that due to this surplus in WMA, the bond auction scheduled for the month of May could also be cancelled. As per the borrowing calendar, the government was supposed to borrow Rs 9,000 crore through the bond auction in May. All these announcements kept the bond market at ease.

This week, the liquidity in the market also increased. The daily average subscription to RBI's 7-day repos stood at Rs 20,820 crore – a 20 per cent rise over previous week. The total outstanding amount at the RBI window (including 7- and 14-day repos both) touched a high of nearly Rs 90,000 crore on Friday. Due to this high liquidity, the call rate too remained below the repo rate of 4.5 per cent over the week.

Another positive for the week was the fall in inflation and the government's assurance on inflation management. The inflation based on Wholesale Price Index fell to 4.4 per cent for the week ended April 3, 2004 from 4.47 per cent in the previous week. The Indian government's chief economic adviser Ashok Lahiri said that inflation was likely to be below 5 per cent in the FY 2004-05.

The rupee reversed its 5-week long gaining trend against the dollar this week. After touching a low of Rs 43.98/$ on Thursday, the rupee finally closed at Rs 43.89/$ on Friday -- a loss of 25 paise over the week. The initial loss was largely due to banks building up long dollar positions on expectations that RBI may tighten its hold on rupee. But as strong dollar inflows continued and RBI's intervention was limited, it resulted in the rupee making a gain on Friday. Meanwhile, India's forex reserves shoot up to $116 billion in the week ended April 9 from $112.7 billion in the previous week.

Outlook
Except for the rise in US yields following strong economic data, there is no negative in the market. Inflation is under control and the liquidity is also comfortable. Due to this, the schedule state government bond auction of Rs 6,500 crore is likely to sail through comfortably. Further, the cancellation of bond auctions has buoyed market sentiment. Thus, bond market is well poised for a good week ahead.