The yield on the benchmark (GOI 2015, 7.38 per cent) went up 13 basis points over previous week to close at 6.73 per cent. With crude oil prices are at an eight-week high, falling inflation did not bring any succour to the bond market. Worries of an interest rate hike also affected the sentiment.
On Monday, the benchmark fell as low as 6.73 per cent but closed higher as the sentiment improved. For the next two days, the market remained under pressure as worries about the rise in oil prices, whether the US Federal Reserve would increase interest rates and if the new issuances of February will be absorbed without affecting the liquidity. The government is expected to raise Rs 5,000 crore in February. On Thursday, the bond markets recovered partially as the market liked the inflation numbers. There was no trading on Friday on account of Bakri Id.
The inflation rate stood at 5.6 per cent compared to 5.78 per cent in the previous week. Crude prices have hit an eight-week high due to the extreme cold in the US, which has driven up prices. Heating oil inventory is 13 per cent lower than previous year. The price of Brent oil futures rose by 49 cents to $45.70 a barrel, after a $2.11 rise in previous week.
The activity in the debt market has reduced with average volume falling from an average Rs 3,500 crore a fortnight ago to about Rs 2,700 crore last week. Participation of banks and large life insurance companies is lesser. The liquidity was reasonable and call rates remained between 4.6-4.8 per cent. The US dollar appreciated by 4 paise to Rs 43.80.
The market will keep a close eye on crude oil prices and if the US Fed will increase interest rates. Though crude oil prices are not rising at the same pace as in the previous fortnight, the prices are unlikely fall rapidly. The government will start borrowing in February, which will play on the sentiment next week.