After a season of political instability, debt markets took a beating on higher than expected inflation and on worries that the new Congress-led coalition government is going to borrow more to meet higher spending. The yield on the 10-year benchmark (GOI 2014, 7.37%) closed at 5.23 per cent -- up 4 basis points over the previous week.
The fall in the corporate bond market was commensurate with the gilt market. The yield on the 5-year benchmark corporate bond also went up 4 basis points to close at 5.88 per cent. The yield on a 5-year government bond (GOI 2009, 11.99%) closed at 4.9 per cent, up 6 basis points. Consequently, the spread between the 5-year corporate bond and government security further widened by a basis point to 99 basis points this week over previous week.
India's wholesale price inflation rose to 4.67 per cent in the week ended May 15 from 4.20 per cent in the previous week. Though global oil prices fell marginally, they remain on the higher side, which could still put pressure on domestic oil prices and hence inflation.
This week, RBI auctioned Rs 1,500 crore worth of 91-day, Rs 1,000 crore 364-day Treasury Bills under the market stabilisation scheme. In addition to these, RBI also auctioned the 10-year state government bonds worth Rs 8,000 crore, which led to liquidity tightening in the market. This was widely reflected in the drastic fall in the subscription to RBI's 7-day repos on Thursday (Rs 8,945 crore on Thursday as against Rs 10,195 crore a day earlier). The tightening liquidity had a larger impact on the call money market. The call rate touched a year's high of 6.50-6.75 per cent on Friday.
The constant decline in trading volume for the past few weeks continued with the daily average volume in the wholesale debt market falling by 28.5 per cent this week to Rs 3,099 crore.
In the currency market, the rupee lost 18 paise against the US dollar this week to close at Rs 45.47/$ on Friday amid fear of falling FII positions following the indications of slowing down of economic reforms by the new government. India's foreign exchange reserves fell to $118.572 billion in the week ended May 21 from $118.628 billion in the previous week.
Outlook
In the coming week, RBI will auction Rs 8,000 crore worth of bonds in the market, which could put further pressure on the already tight liquidity in the market. That apart, the much sought after thing next week will be the government's stance on fuel prices, which will have a major role to play in the future direction of inflation.
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