The RBI Annual Policy Statement announced on April 28 has spelled doom for the Indian bond markets. During the week ended April 29, 2005, the yield on the benchmark 2015, 7.38 per cent GOI bond rose by a massive 18 points to end at 7.24 per cent, as against previous week's close of 7.06 per cent.
Caution prevailed in the markets during the start of the week. After gaining five basis points on Monday, the yield on the benchmark hovered around 7.12 per cent for the first three days. However, the Annual Policy Statement, as announced on Thursday, propelled the yield to shoot up to 7.23 per cent, its highest close since November 8, 2004, when the yield was 7.29 per cent. The yield continued its upward trend and edged up by another basis point to end the week at 7.24 per cent on Friday.
The hike in the reverse repo rate, as announced in the credit policy, came in as a surprise for the bond markets, thus contributing to the negative sentiments. The short-term benchmark rate has been hiked by 25 basis points to 5 per cent from the earlier 4.75 per cent. The move comes as the second successive hike after an increase of 25 basis points which was made on October 27, 2005. The measure has been taken to contain the inflation. However, the bank rate and the cash reserve ratio have been kept unchanged at 6 per cent and 5 per cent, respectively.
Volumes on the wholesale debt market also fell during the week to average Rs 2,652.46 crore, as against previous week's Rs 3,388.21 crore.
Inflation continued its upward trend to touch a four-month high of 5.64 per cent for the 12-month ending April 16, 2005, higher than 5.48 per cent recorded in the previous week. The rise was mainly due to higher prices of food products, manufactured items and energy.
However, there was some good news on the oil front. After rising to 55.27 dollar per barrel on the first day of the week, the oil prices eased to close at 52.15, down from previous week's close of 54.65 per barrel.
Rupee gained strength during the week. Anticipation of Yuan revaluation, coupled with the greenback's weakness against all major international currencies led the Rupee to end the week firm at 43.52 per US dollar.
Call rate remained in the range of 4.60-4.80 per cent for the majority of the week, before declining sharply to 3.00-4.00 per cent on Friday. As on April 29, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 1189.66 crore and Rs 1189.66 crore on a weighted average rate (WAR) of 4.57 per cent and 4.57 per cent, respectively.
At the repos/reverse repo auctions held on April 29, 2005, the RBI absorbed Rs 27,650 crore through 41 bids received at three-day reverse repo auction. It maintained the cut-off rate at 5 per cent. At the one-day repo auction, the RBI did not receive any bids.
On April 29, 2005, the sale of 7.55 per cent Government Stock, 2010 for an aggregate amount of Rs 6,000 crore (nominal) and 7.50 per cent Government Stock, 2034 for an aggregate amount of Rs 2,000 crore (nominal) was announced by the government. The auction will take place on May 3, 2005.
Outlook
The outlook for the bond markets does not look very optimistic for the coming week. The forthcoming auction is likely to put an upward bias on the yield. To add to it, rising inflation may also contribute to the negative sentiment. These two factors suggest that the bond markets may not get time to recover from the surprise delivered by the Annual Policy Statement.
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