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A Silent Week

Indian bond market largely remained range-bound in a low trading week. The yield on the 10-year benchmark closed at 5.7 per cent. High liquidity and low inflation subdued the fear of US rate hike.

It was a relatively silent week on Bond Street. Though the fear of US rake hike resulted in 25 per cent decline in trading volumes this week, low inflation and high liquidity kept the bond market in good stead. The yield on the 10-year benchmark (GOI 2014, 7.27%) closed at 5.07 per cent on Friday – down just a basis point over the week.

Initially, the yield dipped to 5.06 per cent on high liquidity. But, the yields rose after the US Federal Reserve Chairman Alan Greenspan's hinted at a rise in US interest rate. On Tuesday, he said, "The federal funds rate must rise at some point to prevent pressures on price inflation from eventually emerging." But Wednesday's final comment that he did not see any broad-based inflationary pressure despite warming economy helped Indian markets to calm down.

The fear of US rate hike had a greater impact on the corporate bond market. Unlike government bonds, the yield on the 5-year benchmark climbed up 6 basis points to close at 5.53 per cent on Friday. Hence, the spread between the yields on 5-year corporate bond and that on the 5-year government bond widened to 79 basis points this week from 73 basis points in the previous week.

The week also saw the first phase of polling for the Lok Sabha, but it hardly affected the market sentiment as most exit polls showed strong majority of the ruling coalition, thus ensuring stability at the government. The market sentiment also got a lift from the lower inflation number. The inflation based on Wholesale Price Index remained unchanged at 4.4 per cent in the week ended April 10, 2004.

Though the single-day repo has been replaced by the 7-day repos, the subscription to them has hardly shown any sign of decline. This week, the daily average subscription to RBI repos was Rs 19,217 crore. Though the total outstanding amount at the RBI repo window (including 7- and 14-day repos both) fell to Rs 75,000 crore this Friday from Rs 90,000 crore previous Friday, it's still on the higher side. Thus with not much demand for money, the call rate too remained below the repo rate of 4.5 per cent over the week. The government's decision to cancel the scheduled auction and robust dollar inflows have been the key factors in driving up liquidity.

Despite strong dollar inflows, the rupee lost another 15 pasie this week to close at Rs 44.04/$. Last week, the rupee slipped 25 paise to the dollar. This was largely on account of aggressive RBI intervention in the currency market. However, as the forward dollar is cheaper than the spot dollar, the rupee is expected to rise further. The 3-month forward dollar was trading at a discount of 1.3 per cent on Friday. This aggressive dollar mop-up by RBI resulted in India's forex reserves touching a new high of $117.6 billion in the week ended April 16, 2004.

Outlook
On Tuesday, RBI will auction Rs 5,000 crore worth of one-year bond under the government's market stabilisation scheme. This is likely to sail through smoothly following excess liquidity. With widening spread between corporate bonds and government bonds, the demand for corporate issues could rise, resulting in fall in corporate bond yields in the coming week. Though inflation has remained low in the last two weeks, the outlook on interest rate is unclear for now. Therefore, until elections are over, Indian bond market is likely to remain range-bound.