After nine weeks of uninterrupted gains, Indian bond markets turned jittery this week when exit polls hinted at a greater probability of NDA not getting a clear majority at the centre. That apart, the rise in US bond yields on fears of an early rate hike also weighed on the Indian market. But bond prices recovered a bit on the last trading day, as domestic inflation remained at a lower level of 4.4 per cent. Consequently, the yield on the 10-year benchmark (GOI 2014, 7.37%) after touching a high of 5.15 per cent on Thursday, closed at 5.13 per cent on Friday – up 6 basis points over the week.
On Monday, India went through the second phase of the parliamentary elections and the markets were closed that day. But the very next day, the bond markets crashed. Reason: The exit polls conducted by various TV news channels showed gains for the Congress, loss for the BJP and hence a higher probability of a hung parliament. This fear was such so widespread than the 10-year yield reverted back to 5.15 per cent by Thursday.
The US rate hike fear intensified this week after some good economic reports led to the rise in US bond yields. The Federal Open Market Committee is due to meet on the issue on May 4. The Fed's key target for the federal fund rate now stands at a 46-year low of 1 per cent.
The liquidity in the market remained high this week. The daily average subscription to RBI repos stood at Rs 15,245 crore. Though it was less than that in the previous week, it was still on the higher side. The cancellation of Rs 5,000 crore bond auction for the month of April and the robust dollar inflows has been the major contributing factor for this rise in liquidity. However, the auction for the month of May will be as per schedule. On May 6, RBI will conduct twin bond auction of Rs 6,000 crore of 12-year bond and Rs 3,000 crore worth of 24-year bond.
The rupee continued to lose ground against the dollar this week too. With political uncertainty looming large and the subsequent fear of slowdown in economic reform, the rupee closed at a five-week low of Rs 44.5/$ on Friday – a loss of 47 paise over the week. This political instability could also affect the sentiment of FIIs and their investments in India. The fear of rate hike in US has also played its part in the rupee loss this week.
The only positive for the market was the sustained low inflation. The inflation based on the Wholesale Price Index (WPI) remained at 4.4 per cent for the third straight week to April 17, 2004.
Outlook
All eyes will be set on the US Fed meeting on May 4 and the exit poll predictions post third phase of elections on May 5. The market is also likely to get direction from the cut-off yield to be set in the coming week's twin bond auction of Rs 9,000 crore. Provided there is no negative news flow, low inflation and ample liquidity should keep the bond yields range-bound.
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