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Inflation Below 7 Per Cent

It was a good week for bond markets. Yields fell as inflation came under control. The yield on the benchmark bond fell 19 basis points to 6.55 per cent

It was a good week for bond markets. Inflation came below the 7 per cent mark and the yield on the 10-year benchmark (GOI 2015, 7.38 per cent) fell 19 basis points to 6.55 per cent.

The markets opened Monday under uncertainty on inflation and liquidity front. The 10-year benchmark yield (GOI 2015, 7.38 per cent) closed at 6.72 per cent. On Tuesday, the benchmark yield improved to 6.68 per cent, as expectations of a drop in inflation rose. On Wednesday, there was speculation in the market that the government would cancel a Rs 7,000 crore auction under the market stabilisation scheme to control inflation. The government had cancelled two previous bond auctions scheduled for December 1-8 and November 16-24 due to surplus cash. This resulted in the benchmark paper closing at 6.62 per cent.

On Thursday, Reserve Bank of India's report predicted a fall in the prevailing high inflation rate, expecting it to fall below 6.5 per cent by March 2005. The bond market reacted positively and the benchmark bond fell to 6.56 per cent. On Friday, the government announced that inflation had fallen to 6.73 per cent against the market expectation of 6.95 per cent. The yield on the benchmark fell slightly to 6.55 per cent as the lower inflation numbers were discounted earlier during the week.

Call rates hovered between 5.8 and 6.1 per cent for most of the week but on Friday they fell to 4.25-4.50 per cent. The rupee gained 14 paise against the dollar to close at Rs 43.78 on Friday after closing at 43.76 on Thursday. The appreciation in the rupee is due to export remittances and foreign institutional investors pumping in money. Forex reserves rose to $130.6 billion on December 17 from $129.7 billion in previous week.

In the corporate debt market, Reliance Infocomm raised $750 million of debt from Export Development Canada (EDC) and a line of credit US Exim Bank backed line of credit.

The market is going to remain range-bound in a week where little news is expected and global markets are on vacation. Government officials will be meeting this week to decide on a Rs 7,000 crore bond issue under the market stabilisation scheme. The market believes that there is a chance that this auction will be cancelled due to high liquidity. Inflation has already started coming under control in the past few weeks and this trend is likely to continue.