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Bond Markets Extend Gain

Low inflation and Finance Minister's assurance that the government borrowings would be less that the budgeted helped the benchmark yield close six points down at 6.95 per cent

Bond markets ended in the positive territory for the fourth week ended June 3, 2005 in a row. The yield on the 10-year benchmark 2015, 7.38 per cent GOI bond closed at 6.89 per cent, down six basis points from last Friday's close of 6.95 per cent.

After starting the week on a weak note on Monday, the markets made steady gains throughout the week.

Surge in the international crude oil prices coupled with the wait and watch strategy adopted by the traders ahead of the government's auction worth Rs 10,000 scheduled from June 1, 2005, saw the yield on the benchmark touch 7.02 per cent on Monday. However, the sentiments of the markets improved after that, being propelled by the positive triggers that the market participants got.

Finance Minister's indication of the government's intention to borrow less than the budget in the current fiscal so as to curb the fiscal deficit revived the sentiments of the traders.

A lower inflation for the week ended May 21, 2005 also cheered the bond markets. As per the data released, inflation stood at 5.38 per cent, down from previous week's 5.55 per cent. Cheaper primary articles, including food and fuel products, together with a higher base of the last year contributed to the fall in the inflation.

However, the oil prices remained a concern for the markets. The Brent crude closed at 53.11 US dollar per barrel, up from previous week's close of 50.50. International crude oil prices rebounded on supply concerns due to fall in U.S. crude oil inventories.

Rupee also weakened against the US dollar during the week. At the end of the week, rupee was trading at 43.66 per US dollar, weaker from the previous week's closing of 43.52. The Indian currency remained weak throughout the week amid greenback's strength against Euro following France's rejection of the EU constitution in a referendum at the last weekend and month-end oil related dollar demand.

Call money rates remained stable in the range of 4.90-5.10 per cent, before ending the week at 4.90-5.05 per cent. The cumulative borrowing and lending figures (as on June 3, 2005) in the call money market stood at Rs 188.20 crore and Rs 188.20 crore on a weighted average rate (WAR) of 4.92 per cent and 4.92 per cent respectively.

Liquidity was comfortable during the week and the repo lending to RBI remained above Rs 20,000 crore.

During the week, RBI announced auction of 7.37 per cent GOI 2014 bond worth Rs 6,000 crore and 10.25 per cent GOI 2021 bond worth Rs 4,000 crore on June 6, 2005.

Outlook

The government auction for papers worth Rs 10,000 crore in the coming week can put some pressure on the bond markets. The surge in the crude oil prices is also a cause of concern, though, the OPEC meet in Vienna on June 15, 2005 will play a role to set the future direction.

Declining inflation has been bringing cheers to the bond markets in the last few weeks. Though the high base of the last year promises for a continued downward trend, however, the stipulations on the domestic fuel price hike in the coming week can spoil the party.