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Calm on Bond Street

It was an eventful week for the bond markets though bond yields remained at the same levels. The rupee closed at its five-year high

The yield on the 10-year benchmark (GOI 2015, 7.38 per cent) closed 2 basis points higher than the previous week at 6.57 per cent. Inflation rate provided solace as they closed at a 23-week low. The market was spooked by the forthcoming meeting on the Rs 7,000-crore auction under the market stabilisation scheme scheduled between Jan 1 and 8, 2005.

On Monday and Tuesday, the government's decision was top of the mind for bond traders. Government officials were to announce whether the government would conduct the auction or cancel it on Wednesday. Since the government has cash, the market was expecting that this auction would be cancelled. The benchmark closed at a yield of 6.55 per cent and 6.51 per cent on Monday and Tuesday, respectively.

On Wednesday, government officials postponed the decision on the auction to a time closer to the date. Bond markets were not happy and the yield rose by 2 basis points to 6.53. On Thursday, the benchmark yield went up to 6.55 per cent as the market was unhappy with the uncertainty on the auction. On Friday, a government official said the government would conduct the auction in January and would announce the date on Monday. The benchmark yield rose to 6.57 per cent as the market did not like the auction announcement. The central bank also announced it was planning to auction bonds of Rs 26,500 crore in January-March 2005 under the market stabilisation scheme. These would be 91-day and 364-day treasury bills. The central bank also said that it had the flexibility for additional sales of treasury bills and bonds under the scheme.

The Indian GDP growth rate for July-September 2004 quarter stood at 6.6 per cent. Though this figure was higher than the consensus estimate of 6.25 per cent, this was the lowest growth since the June 2003 quarter. Inflation rate fell for the fourth consecutive week ended December 18 to 6.5 per cent, mainly due to cheaper food items, edibles oils and manufactured products.

Call rates ranged between 5.75-6 per cent for most of the week but declined to 4-4.5 per cent on Monday. The rupee gained another 33 paise to Rs 43.45 to close at its five-year high. FII inflows continue to be solid.

Outlook
The government cancelled two auctions under the market stabilisation scheme in 2004-05, but has decided to continue with the Rs 7000-crore auction in the first week of January. The market is not going to be too excited about the auction this week. The markets have also to react to the second quarter GDP numbers. Bond yields could harden marginally this week.