VR Logo

Bonds Rally as Oil Prices Dip

The cancellation of bond auction and fall in global crude oil prices cheered Indian bond markets. The yield on the actively traded bond (GOI 2015, 7.38%) dipped 45 basis points to close at 6.76 per cent

What an interesting week it was! The cancellation of scheduled bond auction and fall in global crude oil prices helped restore investors' confidence back in the bond markets in a big way. The yield on the actively traded bond (GOI 2015, 7.38%) dipped 45 basis points over the week to close at a five-week low of 6.76 per cent on Friday. The market sentiment was also buoyed by the data showing lower fiscal deficit in the first half of FY 2004-05 and the government's intention of lowering the borrowing target for the current fiscal. The inflation, however, remained unchanged at 7.34 per cent for the week ended November 20, 2004.

The market participants were cautious from the very start of the week following uncertainty over the bond auction scheduled for December 1-8. On Tuesday, the markets remained flat following the government data release, which showed that the country's fiscal deficit for April-October was less than half of the full year's target.

On Wednesday, as the government had good cash positions, it cancelled the said auction resulting in a sharp rally in the bond market. The yield on the actively traded bond dipped 13 basis points on the same day (Wednesday). The sentiment was also perked up by the finance ministry official's comment that the government might reduce the borrowing target for the current fiscal year.

But the biggest surprise came on Thursday, when the global crude oil prices plunged. The London Brent crude fell to $41.22 a barrel on Thursday from a week's high of $ 46.03 per barrel. This sharp slide in oil prices raised market expectation that the domestic fuel prices may also come down resulting in fall in domestic inflation. This together with the cancellation of bond auction resulted in a 28 basis points fall in the actively traded bond yield. The inflation based on Wholesale Price Index, however, remained unchanged at 7.34 per cent in the year through November 20. The impact of reduction in petrol prices was offset by rise in prices of primary articles.

The liquidity in the market remained comfortable with call rate hovering in the low range of 4.0-4.8 per cent throughout the week. In the reverse repo auction, the RBI received bids worth average Rs 8,123 crore indicating ample liquidity in the market.

The rupee gained 85 paise over the week to close at 44.13/$ on Friday. In fact, the domestic currency hit a seven-and-a-half month high of 44.11/$ on Thursday due to strong forex inflows and the weakening US dollar globally.

Outlook
Indian bond investors have taken a huge sigh of relief this week following the dual good news of fall in international crude oil prices and lower government borrowing for the current fiscal. Both these news is likely to go a long way in containing inflation in the coming weeks especially if the fall in oil price is sustained over a period of time. Moreover, the improvement in market liquidity is also expected to have a positive effect on the market. With no schedule auction left in this calendar year, bonds may be in for some more gains.