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Another Flat Week for Bond Market

The bond market sentiments remained subdued for the week ended April 1, 2005. Forthcoming auction and oil prices to decide direction in days to come

The bond markets' sentiments remained subdued for the week ended April 1, 2005. The yield on the benchmark 2015 7.38 per cent GOI bond closed almost flat at 6.68 per cent, gaining one basis point over previous week's close of 6.67 per cent. The week also marked the closure of the financial year 2004-05 at 6.68 per cent against the last year's close of 5.16 per cent, a rise of 153 basis points.

Sentiments in the bond market was cautious after the announcement of the government's borrowing calendar for the fiscal year 2005-06 on March 28, 2005. Lower floating rate component and maximum borrowing programme concentrated in the medium to long tenor made players a bit nervous thereby winding their position in the longer tenor. The government plans to borrow around Rs 8,000 crore between April 4 and 12, 2005. However, markets experienced some valuation and liquidity based buying followed by some immediate profit booking keeping the prices range bound.

The inflation figure for the economy remained subdued. The latest wholesale price index inflation stood at 5.11 per cent for the year ended March 19, 2005, lower than the previous figure of 5.23 per cent for the 12 month ending March 12, 2005. The dip was mainly caused by a fall in energy and food prices.

International crude oil prices continued to be a cause of concern for the traders. The week started on a positive note with a slight ease in crude prices on the back of higher US crude inventories. The Brent crude touched a low of 53.15 US dollar per barrel on March 30, 2005. However, oil prices edged up on Friday as the US government reported a fall in the supply of petrol and distillate fuel.

The average volumes on the wholesale debt market during the week ending April 01, 2004 was at Rs 3052.90 crore as against previous week's average of Rs 1666.85 crore. The volumes dipped to Rs 612.26 on Friday due to annual account closing.

On the liquidity front, the markets were almost stable throughout the week except on March 30, 2005, when the call rate slipped to the levels of 2-3 per cent amid ample availability of funds in the system. This was mainly caused due to persistent buying of dollar by RBI and huge tax inflows near the year-end. However, on March 31, 2005, call rates recovered back to 4.60-4.80 per cent which was same as the previous month's close. The cumulative borrowing and lending figures as on April 01, 2005, in the call money market stood at Rs 824.64 crore and Rs 824.64 crore on a weighted average rate (WAR) of 4.55 and 4.55 per cent, respectively.

The rupee witnessed some weakening in the first few days of the week on account of strengthening US dollar against all major currencies. The rupee closed at a five-week low of 43.81 on March 29, 2005 but recovered back to 43.74 on March 31, 2005.

Bond market is likely to trade cautiously in the week ahead. The response to fresh issuance of Rs 8,000 crore beginning April 4, 2005, will be crucial in deciding the direction of the market. However, crude prices will continue to be volatile in the coming month. Any further increase will put pressure on the domestic bond market.