The yield on the benchmark (GOI 2015, 7.38 per cent) went up by by 2 basis points over previous week. A forthcoming auction, an interest rate hike in the US, and a one per cent rise in the employee provident fund cast a shadow on the bond markets. The positive news of falling oil prices, lower inflation and a Standard & Poor's announcement on its India outlook provided some succour to bond market participants.
On the first two days of the week, market participants remained worried about the forthcoming auction of Rs 5,000-crore bonds that was scheduled between February 1-8 and a rate hike in the US at a meeting on Wednesday. But crude oil prices started dropping, which helped the yield on the benchmark to fall three basis points on Monday. Yields remained stable on Tuesday. On Wednesday, bond prices went up as Standard & Poor's said its outlook on India was stable. It also raised India's long term foreign currency rating to BB+ and affirmed India's long term local currency rating at BB+. The government also said it would hold the bond auction on February 7.
The next day, the government's announcement to hike the EPF rate by 1 per cent to 9.5 per cent shook the market. The benchmark yield rose by 3 basis points. The US Fed raised the key Fed rate hike on Wednesday by 0.25 basis points to 2.5 per cent, which pushed the market down too. A government statement that the EPF rate hike did not indicate a trend of rising interest rates helped stem some worries. Inflation fell by 0.05 per cent to a 34-week low 5.37 per cent. The benchmark yield fell by 1 basis point to close the week at 6.72 per cent.
The debt market was comfortable on the liquidity front. Call rates ranged between 4.6 and 4.8 per cent. Oil prices have been on a decline as the weather has improved in the US. Brent crude oil price fell by 4.4 per cent to $43.95 a barrel. The rupee gained 26 paise vs the US dollar with the dollar closing at Rs 43.46.
Outlook
Bond prices seem poised to rise next week once the auction is out of the way on Monday. Oil prices and inflation are both coming down. The rise in yields on account of the US Fed hike and the EPF interest hike was marginal. There is ample liquidity too. Unless there is an untoward incident, the market should turn slightly bullish.
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