The markets slumped as fears of the proposed transaction tax in the Union Budget continued to cast its shadow on the bond yields. As a result, the 10-year benchmark bond (GOI 2014, 7.37%) rose by 21 basis points over the previous week to close at 5.96 per cent. The sentiment was also bogged down as the government announced the sale of 2-year bonds worth Rs 5,000 crore under the market stabilisation scheme. In the middle of the week, the sentiment perked up, as there were hopes that the board of trustees of the Employees Provident Fund would lower interest rates on savings held in the fund in order to keep it in line with the market rate. But when the fund deferred its decision by a week, the sentiment was dampened.
Inflation based on Wholesale Price Index continued to remain above the 6 per cent mark – to 6.16 per cent for the week ended July 3, 2004, a 7 basis points rise over the preceding week. The rise was mainly on account of increase in prices of aviation turbine fuel and manufactured items. Markets were also edgy about the US consumer inflation data towards the end of the week, which could set the tone for a rise in interest rates by the US Federal Reserve.
In the corporate bond market, the yield on the 5-year benchmark bond went up by 6 basis points at 6.56 per cent over the week. On the other hand, the yield on the 5-year government bond rose by 20 basis points to close at 5.59 per cent over the preceding week. However, the spread between the corporate bond and the federal bond narrowed down to 95 basis points this week.
On Wednesday, RBI auctioned Rs 1,500 crore 91-day Treasury bills and Rs 5,000 crore 2-year bonds under the market stabilisation scheme. This was widely reflected in a drastic fall in the subscription to RBI's 7-day repo, which registered a 17 per cent decline over the preceding week. Also, the 7-day repo outstanding at the RBI window fell to Rs 50,665 crore from Rs 60, 760 crore, a week earlier.
In the currency market, the rupee depreciated 29 paise against the US dollar to close at Rs 45.95 on Friday. Erratic monsoons gave foreign investors another reason to sell in an agro-dependent economy. The rupee touched an intra-week low of Rs 46.11 on Thursday after the RBI intervened in the market thereby halting the free fall. India's foreign exchange reserves rose to $120.78 billion on July 9, 2004 from $120.08 billion, a week earlier.
The daily average volume in the wholesale debt market fell by a whopping 30 per cent this week to close at Rs 2,126 crore. The ambiguities revolving the issue of proposed imposition of transaction tax marked the absence of most dealers and institutions from then market.
Outlook
The high inflation number has aroused fear in the already dampened debt market, in turn raising the outlook for domestic interest rates. Also, there is a lot of uncertainty prevailing in the market with regard to the issue of transaction tax proposed in the Annual Budget on securities issued through stock exchanges. Until this ambiguity is cleared, the market sentiment is likely to remain sluggish.
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