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Bonds Stay Still

Higher oil prices pushed bond prices lower while lower inflation countered the rise

There was virtually no movement in the weekly bond prices as the yield on the 10-year benchmark bond (GOI 2015, 7.38 per cent) went up by 2 basis points to 6.48 per cent after a 26 basis point fall in the previous week. Profit-booking and concerns on the forthcoming auction led to a decline in bond prices in the first three days. But positive news flow on the last two days led to yields gaining ground.

The market opened on Monday with rising crude oil prices. The 10-year benchmark paper closed 2.5 basis points higher. The Reserve Bank of India said that it would sell 16 state government loans with a maturity of 12 years and coupon of 7.17 per cent on February 22 for Rs 6,300 crore. There was some profit-taking too. All this resulted in bond yields losing 3 basis points on Tuesday and 2.5 basis points on Wednesday. On Thursday, there was news that the government was likely to bring the interest rate on popular savings scheme in line with inflation. This led in bond yields falling by almost 3 basis points. On Friday, news on inflation resulted in another 3 basis point fall.

Oil prices went up last week after falling in the previous week. There was news of OPEC reducing production to stop the price from falling further. Brent crude oil prices rose by $1.29 to $46.02 through the week. Inflation rate slipped to 5.01 per cent in the week ended February 5, as compared to the previous week's level of 5.25 per cent.

There was some pressure on the liquidity. Call rates were higher last week as there was a higher demand of funds from commercial banks. The dollar ended the week at Rs 43.83, about the same levels as previous week.

Outlook
Inflation is coming under control but rising oil prices may not keep it as low as 5 per cent. Oil prices are likely to stay high if OPEC actually cuts production. Bond markets are likely to remain range-bound and the Budget is likely to decide the future course.