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Lower inflation and RBI Governor's statement help benchmark 2015, 7.38 per cent GOI bond gain four basis points to end the week at 6.85 per cent

Bond markets edged up during the week ending June 10, 2005. The yield on the 10-year benchmark 2015, 7.38 per cent GOI bond ended at 6.85 per cent, down four basis points from previous week's close of 6.89 per cent.

The markets remained weak on Monday as traders booked profits to make room for the RBI auction. RBI set the cut-off price of Rs 103 at the auction of 7.37 per cent 2014 bond, and Rs 125.71 on 10.25 per cent 2021 bond. The twin auction were worth Rs 10,000 crore. However, the markets reversed the trend the very next day on the back of buying support after the completion of the auction. The markets maintained the upward momentum for the next two days, before slipping marginally on Friday because of a rise in the US yields.

Positive statements by the RBI Governor provided a boost to the sentiments mid-way during the week. RBI Governor Y.V. Reddy remarked that government's focus on the fiscal deficit has resulted in smooth coordination of monetary fiscal policy, and that the quarterly review of the monetary policy is not likely to throw an unexpected move.

Inflation maintained its downward trend for a fourth straight week to 5.20 per cent for the week ended May 28, 2005, down from 5.38 per cent for the week before. Last year's high base, coupled with lower prices of primary articles including pulses, fruits and vegetables led to the fall in inflation.

After witnessing a volatile week, the prices of crude oil ended higher. At the end of the week, Brent crude was trading at 53.76 US dollar per barrel, higher than the previous week's close of 53.11. Oil prices rose over the concerns that an approaching tropical storm could disrupt refining operations in the Gulf of Mexico. However, oil price may ease off a bit in the coming week as the storm concerns have more or less subsided. Reduced demand from China will also but a downward bias to the prices.

Rupee ended the week stronger at 43.56 per US dollar, against the previous week's close of 43.66. Rupee gained strength during the week as the rising pressure on China for the yuan revaluation ahead of the G7 meet helped Asian currencies to firm up. However, the Indian currency turned marginally weak on Friday following Fed chairman's indications that US economy is on a firm footing, and further rate hikes may be likely.

After remaining steady at 4.95-5.05 per cent for the majority of the week, call rates firmed up on Friday to end the week at 5.10-5.25 per cent.

At the repos/reverse repo auctions held on June 10 2005, the RBI absorbed Rs 13,620 crore through 29 bids received at three-day reverse repo auction. It maintained the cut-off rate at 5 per cent. At the three-day repo auction, the RBI did not receive any bids. The cumulative borrowing and lending figures (as on June 10, 2005) in the call money market stood at Rs 900.12 crore and Rs 900.12 crore on a weighted average rate of 5.05 per cent and 5.05 per cent respectively.

On June 9, 2005, the RBI stated that 11 states would enter the debt market to raise Rs 24.81 billion through the sale of 10-year loans scheduled on June 14, 2005.

Outlook

The sale of 10-year loans by 11 states can turn the bond markets jittery in the coming week. Traders will also keenly wait for the OPEC meet which can turn in some good news. There have been some indications that OPEC, in its next meet scheduled on June 15, 2005 at Vienna, might increase its production ceiling from the current 30 million barrels per day.