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Pricey Oil: Bonds Suffer

Sharp rise in international crude oil prices and government's plan to borrow Rs 1,10,291 crore in 2005-06 disappointed the bond market. The benchmark yield fell 16 basis points over the week

The recent spurt in international crude oil prices and government's plan to borrow Rs 1,10,291 crore in 2005-06 hit the bond market hard in the week ended March 4, 2005. At the end of trading on Friday, the yield on the 10-year benchmark bond (GOI 2015, 7.38 per cent) soared to 6.66 per cent, up 16 basis points from previous week's close of 6.50 per cent.

The combined effect of the above two factors resulted in the benchmark yield rising by more than 10 basis points in just two days after the Budget was tabled in the Parliament.

International crude prices surged to a four-month high as it breached US$ 50 per barrel over cold wave sweeping across US and Europe straining supplies and OPEC's indication that it might resort to a production cut in its forthcoming meeting in Iran. The meeting is scheduled for March 16, 2005. On London's International Petroleum Exchange, the April Brent crude-oil futures contract was quoted at US$ 51.95 per barrel.

Bond market sentiment improved a bit when inflation figure for the week ended February 19, 2005, was announced. It declined to 4.83 per cent, lower than previous week's 5.01 per cent.

Call money rates fell considerably to close at 4.00-4.25 per cent on Friday as compared to its last week's close of 4.60-4.80 per cent. Call money rates edged down amid ample liquidity.

At the repos/reverse repo auctions held on March 4, 2005, the RBI absorbed Rs 41,005 crore through 53 bids received at three-day reverse repo auction. It maintained the cut-off rate at 4.75 per cent. At the three-day repo auction, the RBI did not receive any bids.

The Budget has also re-introduced 182-day Treasury Bills and would raise Rs 1,300 crore through 182-day T-Bills. The government had raised funds through 182-day T-Bills in mid-2001.

Rupee closed at 43.7500/7600 per US dollar on Friday, slightly lower as compared to its previous week's close of 43.7250/7400. Robust foreign fund inflows pouring into the upbeat stock market supported the rupee. However, RBI intervention and greenback's strength against other currencies capped rupee's gains. Markets are waiting for the release of US non-farm payroll data, which is likely to provide some direction to the dollar.

Bond market sentiments look weak and is likely to continue over the next week owing to the hike in government's borrowing plans and the surge in international crude oil prices. The markets are expecting a further hike in crude prices which is likely to weigh heavy on the sentiments.