After a long time, it was a good week for the Indian bond market investors. The yield on the actively traded G-sec (GOI 2015, 7.38%) fell 15 basis points this week to close at 7.08 per cent on Friday. The reduction in petrol prices, cancellation of the week's schedule bond auction and the market belief that the inflation has peaked and would ease in coming weeks helped recover bond prices.
All the good news also increased the trading activity in the market. The daily average trading volume in the Wholesale Debt Market crossed Rs 3,000-crore mark in the last two trading sessions after a long gap. However, tight liquidity remains a cause of concern as call rate moved in a high band of 5.75-6.25 per cent. In fact, RBI received no bids in its daily reverse repo auction indicating how tight the liquidity in the market had been. To provide a cushion, RBI infused Rs 63,510 crore in the market via a repo auction.
This tight liquidity also forced the government to cancel its schedule auction of Rs 5,000 crore 10-14 year bond due for November 16-24. However, the government supported this move by saying that it currently holds comfortable cash positions. Whatever be the reason, this definitely acted as a pain reliever for the market participants and the yield on the actively traded bond fell 11 basis points in the last two trading sessions.
Inflation however, once again shot up to 7.76 per cent for the week ended November 6, 2004 from 7.06 per cent in the previous week especially due to hike in oil prices during the period. But as the petrol prices have been cut at the start of the week, most market players are expecting that the inflation has touched its zenith and would start falling in coming months.
The rupee continued its gaining streak for the fifth straight week. The Indian currency, in fact, touched a five-month closing high of 47.07/$ on Tuesday, helped by strong foreign investments. However, the rupee closed a bit lower at 47.10/$ on Friday - a gain of 5 paise over the week.
Outlook
The market expectation of a fall in inflation due to cut in petrol prices and the favourable base effect has brought some smile back on the faces of bond investors. The sentiment is expected to remain favourable as there's no bond auction lined up for the next two weeks. The trading volume has also improved which means more and more investors are coming back in the market. However, the recent spurt in international oil prices may worry bond market investors in the coming week. On Friday, the US Light crude price rose over $2 a barrel to close at $48.44 and the London Brent crude gained $2.13 per barrel to $44.89. Thus, the movement in the global oil prices will be the key thing to look at.
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