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Bond Markets End Flat

Bond markets closed at the same level as previous week. Though inflation fell, crude oil played the spoilsport

The bond market closed at the same levels as the previous week with the yield on the 10-year benchmark (GOI 2015, 7.38%) closing at 6.57 per cent.

On Monday, the yield hardened by 2 basis points, though there were signs of improvement in liquidity. The next day, bonds rallied and the yield fell by 7 basis points. That was the day when the Reserve Bank of India auctioned bonds amounting to Rs 7,000 crore. On Wednesday, bonds stayed at the same level as Tuesday. The government also announced a fresh sale of state government loans worth Rs 6,000 crore. A weak dollar and the tanking of the stock market, plus a steady supply of issues pushed the yield up on Thursday and Friday.

The central bank auctioned 9.39 per cent 2011 bonds for Rs 5,000 crore and 7.50 per cent 2034 bonds worth Rs 2,000 crore. For 2004-05, the government has raised Rs 96,000 crore through market borrowings and private placements with Reserve Bank of India. If this Rs 75,000 crore is by way of bonds and Rs 21,000 crore is by way of treasury bills.

Inflation continued to fall. It stood at 6.39 per cent as on December 25, down from 6.50 per cent a week earlier due to lower manufactured product and energy prices. International global crude oil price spiked on Thursday. The Brent February contract shot up by $2.34 on Thursday and another $0.25 on Friday to $43.10 a barrel. Oil prices rose due to a fall in US natural gas inventories, which triggered concerns about winter fuel stocks. There were also fears of a labour dispute in Venezuela affecting production and OPEC reducing output.

There was an improvement in the liquidity during the week. Call rates hovered between 4 and 5.5 per cent. The rupee fell by 39 paise against the dollar to Rs 43.84.

Outlook
On Tuesday, the central bank will raise Rs 6,000 crore for state governments, and no other auction is expected in the immediate future. Good times seem to be in sight for bond markets as inflation is coming under control. The central bank may now not feel the need to hike interest rates. Petroleum prices can spoil the party though.