After a good recovery in the previous week, Indian bond markets once again turned its tail down. The hike in railway freight rates, rise in global crude oil prices and concern over the forthcoming auction overplayed the goodies like fall in inflation and rollback of LPG price hike. Consequently, the yield on the actively traded bond (GOI 2015, 7.38%) rose 14 basis points over the week to close at 7.21 per cent on Thursday. The markets were closed on Friday on the occasion of Guru Nanak Jayanti.
One of the interesting things about the week was the improvement in market liquidity. The call rate slipped to near reverse repo rate of 4.75 per cent following inflows like coupon payments on banks' government bond holdings and rupee inflows through RBI's intervention in the currency market. The call rate had been moving in the higher range of over 6 per cent in the last couple of weeks. In the last two trading sessions, RBI stopped infusing money in the market via repo auction. And in the daily average RBI's reverse repo auction, bids worth over Rs 5,500 crore were accepted indicating recovery in market liquidity.
Despite improvement in market liquidity, government bonds remained subdued following concerns over rising global oil prices and the forthcoming auction of Rs 8,000 crore scheduled for December 1-8. The London Brent Crude once again shot up to $ 44.47 a barrel on Wednesday from $ 43.44 per barrel in the previous Friday. But bond yields eased a bit after government announced a rollback of LPG price hike. On Wednesday, the government has abandoned its plan to raise prices of LPG by Rs 5 every month.
But that ease didn't remained long. The announcement of hike in railways freight rates, which in turn is expected to fuel inflation shivered the bond market participants. The railway freight rates have been raised to offset higher fuel and steel prices. However, towards the last trading sessions, bonds recovered some ground as a state-run insurer increased their exposure in the market. These firms are receiving heavy inflows from quarterly premiums towards the year-end and hence are deploying the surplus funds in the market.
The inflation, however, fell to 7.34 per cent during the week ended November 13, 2004 from 7.76 per cent in the previous week, on account of cheaper vegetables and other essential food and manufactured products.
The rupee breached the 45/$ mark for the first time in five-and-a-half months on Friday due to some good exporter remittances and the fall in US dollar globally. The Indian currency closed at 44.98/$ on Friday -- a gain of 12 paise over the week.
Outlook
Indian bond yields are once again back to the two-week old levels now. This is not a healthy sign for the bond investors considering the fact that inflation is not expected to fall much following the recent hike in railway freight rates and the surging international crude oil prices. Those apart, the market is also worried over the government's fresh issuance of bonds between December 1-8, which will drain out Rs 8,000 crore from the market thus affecting market liquidity. Hence, caution is the order of the day.
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