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Down, down, down

Debt markets continued to tumble amid concerns of a growing inflationary pressure in the economy. The 10-year bechmark yield crossed 6 per cent. Inflation remained static at 6.52 per cent.

Amid concerns of a rising domestic inflationary trend coupled with a firm trend in global interest rate outlook, the bond markets continue to fall headlong with the yield on the 10-year benchmark bond (GOI 2014,7.37%) surpassing the psychological stumbling block of 6 per cent to close at 6.17 per cent -- up a whopping 23 basis points over the previous week. However, on Thursday, the benchmark yield touched a 16-month high of 6.21 per cent but eased 4 basis points on Friday as the inflation for the week ended July 17 remained unchanged at 6.52 per cent.

Indian bond prices continue to move downwards this week on concerns of a rise in domestic fuel prices by oil companies which could stroke the possibility of a further rise in inflation. The fear of a hike in US Fed rate also loomed large on the market as the US Consumer Confidence Index showed further improvement. The on-tap sale of 6.35 per cent 2013 state government loans amounting Rs 8,500 crore on Wednesday, too, dampened the sentiment.

After having risen continuously for the past three weeks, inflation based on the Wholesale Price Index stayed unchanged at 6.52 per cent. This is in spite of the fact that the prices of primary items and manufactured products have increased a bit. The government also said that the inflation for the ongoing fiscal would not exceed beyond 5.5 per cent. Following the crisis at the Russian oil giant Yukos, the price of Brent crude rose to $39.70 per barrel this week from $38.26 per barrel, a week earlier.

In the corporate bond market, the yield on the 5-year benchmark corporate bond rose 17 basis points to close at 6.75 per cent over the previous week. On the other hand, the yield on the 5-year federal bond rose 14 basis points to close at 5.78 per cent over the week. However, the spread between the corporate and the government bond remained unchanged at 93 basis points this week.

The average weekly subscription to the RBI's 7-day repo recorded a 7 per cent decline over the preceding week. Also, the 7-day repo outstanding at the RBI window slumped to Rs 51,195 crore as compared to Rs 55,110 crore, a week before. However, the call rates remained below the repo rate of 4.5 per cent, hovering between 4.25-4.50 per cent over the week.

With the Finance Minister ruling out the transaction tax in the bond market, the daily average volume in the wholesale debt market rose 7.5 per cent this week at Rs 2,471 crore. Though, the daily volume fell to 1,410 crore on the first day of the week amidst inflation worries but subsequently charted an upward path and climbed to Rs 3,222 crore on Friday.

In the currency market, the rupee depreciated 12 paise against the US dollar to close at a 13-month high of Rs 46.44 on Friday on account of heavy demand from importers and corporates. The weakness in the rupee left the RBI with no option but to intervene by pressing huge dollar sales which led to the outflow of rupee from the market.

Outlook
In August, the RBI will undertake a twin-bond auction under the regular government borrowing programme worth Rs 8,000 crore. It will also auction market stabilisation bonds worth Rs 2,500 under the market stabilisation scheme on Wednesday. These auctions are likely to pass through comfortably as there is enough liquidity in the market.

The yields have risen continuosly for the past several weeks after the RBI Governor reiterated that the central bank would have to revisit its soft monetary policy stance if US Fed further resort to a rate hike. Also, the high domestic inflationary trend is exerting pressure on the domestic interest rates. Markets are also eagerly awaiting the US Fed Reserve meeting to be held on August 10 to see where the global interest rates are heading.