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Silence Before The Storm

The bond prices moved in a narrow band during the week ahead of RBI's Monetary Policy Statement, which is due on October 26. While interest rates are likely to remain stable, the forecast for inflation may be hiked

Indian bond markets finally took a breather in the week ended October 21, 2004. The cancellation of the week's auction, slight fall in global crude oil prices and the drop in domestic inflation did the trick. Those apart, the market expectation that the key interest rates would remain unchanged in the forthcoming Monetary Policy Review on October 26, also helped buoy market sentiment. As a result, the yield on the 10-year benchmark bond (GOI 2014, 7.37 per cent) after touching the year's high of 6.81 per cent on Monday, eased off to close at 6.74 per cent on Friday–down three basis points over the week.

As per the government's borrowing calendar, the RBI was supposed to auction Rs 5,000 crore worth of 5-9 year bond between October 18-25. However, on Monday, government cancelled this auction thus providing some relief to the investors as the liquidity was already tight in the market due to the CRR hike last month and the advance tax outflows. The daily average subscription to RBI's one-day Repos fell to mere Rs 2,500 crore from over Rs 20,000 crore one month back. This had also put some pressure on the inter-bank call rate, which remained above the repo rate of 4.5 per cent in the range of 4.6-4.8 per cent in the last two trading sessions.

Though market sentiment was positive due to the cancellation of bond auction and the drop in global oil prices, but market participants were not willing to take any position before the Monetary Policy Statement. This was widely reflected in the low market activity–the daily average trading volume in the Wholesale Debt Market stood below Rs 3,000 crore. International crude oil prices also eased a bit at the start of the week-the US light crude fell to $52.95 per barrel after touching a record high of $55.33 a barrel, but has once again started to shoot up towards the end of the week.

The biggest relief for the market had been the fall in domestic inflation. The inflation based on Wholesale Price Index fell to 7.1 per cent for the fourth consecutive week ending October 9, 2004. The rate of inflation, however, is expected to rise if there is another hike in petrol and diesel prices.

Interestingly, in the past one month, the rise in yields have been more pronounced in case of government bonds as compared to the rise in corporate bonds' yield. Hence, the spread between the five-year corporate bond and the government security of same duration has narrowed down to 49 basis points from around 70 basis points one-month back.

In the currency market, the rupee recorded a fresh three-month high of 45.73/$ on Friday – a gain of 13 paise over the week, especially due to huge foreign fund inflows. The weakening of US dollar in the international market also helped the rupee in making gains. The US dollar fell to an eight month low against the Euro and multi-month lows versus Yen, Sterling and Swiss frank due to the increasing fear that the US economy may not be growing enough to support its currency.


The cautious stand taken by most market participants have kept the 10-year yield in a narrow range of 6.67-6.82 per cent in the past two weeks. And the low trading volume further indicates the lack of market conviction about where the interest rates are headed. Hence, all eyes are now set on the RBI's Monetary Policy Statement to be announced on October 26. While interest rates are likely to remain stable, the forecast for inflation may be hiked. For now, over to RBI Governor Mr Y.V. Reddy.