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Liquidity Concern Troubles Markets

Bond markets lost ground during the week ended June 17, 2005. Liquidity concerns loomed large over the markets amid advance tax flows by corporates, state loan issuance and central government auction

Bond markets lost ground during the week ended June 17, 2005. Liquidity concerns loomed large over the markets amid advance tax flows by corporates, state loan issuance and central government auction. Higher oil prices added to the worries of the traders. Even a considerable fall in the inflation failed to make a significant impact on the sentiments of the traders.

The yield on the benchmark 2015, 7.38 per cent GOI bond moved up by 11 basis points over the week to end at 6.96 per cent on Friday. Markets slipped for the first two days of the week over liquidity concerns. Corporates were required to make their advance tax payments before June 15, 2005. This, coupled with the state loan issuance, put pressure on the liquidity. On Tuesday, the RBI set a cut-off yield of 7.39 per cent on 10-year loans issued by 10 states (Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Manipur and West Bengal), while it set a cut-off yield of 7.35 percent for the loan issued by Tamil Nadu. The sale was conducted through a yield-based auction using the multiple price method. The 11 state governments tapped the market to raise a total of Rs 24,810 crore.

On Wednesday, the markets reversed the trend to recover a bit as the traders set aside the liquidity concerns in anticipation of lower inflation figure. However, the markets resumed their losing trend as the finance minister's statement that the central government would go ahead with its borrowing plan Rs 5,000 crore scheduled between June 16-24, 2005 induced the traders to sell their positions to make room for the fresh issuance.

The volumes on the wholesale debt market remained thin throughout the week, averaging Rs 2,405.624 crore.

Inflation continued to decline for the fifth consecutive week to 4.22 per cent for the week ended June 4, 2005, significantly lower from previous week's 5.20 per cent. A high base effect and lower prices of fruits and vegetables contributed to the fall.

Oil prices remained a cause of concern during the week, as they surged beyond $55 per barrel despite OPEC agreeing to boost its production quotas by 5,00,000 barrels a day in its meeting on Wednesday. The surge came on the back of concerns that the refiners might not be able to keep pace with the growing demand.

Rupee ended almost flat at 43.55 per US dollar, as against previous week's 43.56. The Indian currency slipped during the first three days of the week, as the dollar touched its nine-month high against the euro. However, rupee recovered the lost ground during the later part of the week as the FII inflows remained positive and the euro rebounded against the dollar.

Call rates remained steady in the range of 4.95-5.10 per cent for the major part of the week. However, higher demand for funds in wake of dwindling liquidity saw the call rates surge to 5-5.20 per cent on Wednesday.

At the repos/reverse repo auctions held on June 17, 2005, the RBI absorbed Rs 9,145 crore through 25 bids received at three-day reverse repo auction. It maintained the cut-off rate at 5 per cent. RBI did not receive any bid at the three-day repo auction.

As on June 17, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 611.07 crore and Rs 611.07 crore on a weighted average rate (WAR) of 4.96 per cent and 4.96 per cent respectively.

Outlook

The central government's borrowing worth Rs 5,000 crore scheduled between June 16-24, 2005 is likely to check the advances of the bond markets as the liquidity will remain tight. High crude oil prices will contribute to the negative sentiments of the market. A continued downward trend of inflation is the only positive trigger for the traders.