Bond markets lost ground during the week ended July 01, 2005. After causing jitters at the start of the week, the oil prices eased later. However, tight liquidity continued to weigh heavily upon the markets sentiments throughout the week, pushing the bond yields up.
The yield on the popularly traded 2015 GOI 7.38 bond ended at 6.97 per cent, up a massive 10 basis points from last Friday's close of 6.87 per cent. Bond markets slipped on Monday as the rising crude oil prices evoked negative sentiments. Petroleum minister Mani Shankar Aiyar also expressed concerns over high crude oil prices. However, Tuesday and Wednesday brought some respite to the bond markets as the yield eased a bit. Expectation of the cancellation of the scheduled borrowing by the central government worth Rs 10,000 crore during the first week of July, coupled with a recession in the crude prices, triggered good buying support. However, traders remained cautious and booked profits at the higher levels, which restricted the recovery of the bond markets.
The recovery was cut short on Thursday, as the finance minister remarked that the government would go on with its scheduled borrowing plan. The weakness continued to prevail on Friday as a less than expected fall in inflation failed to cheer the bond markets. Federal Reserve's decision to hike the interest rates by 25 basis points did not have much impact as the markets were already anticipating the hike.
Inflation dropped to 4.10 per cent for the week ended June 18, 2005. Lower textile prices led the inflation to drop from previous week's 4.33 per cent. This is the lowest since August 30, 2003, when the inflation was 3.88 per cent.
Despite this, it failed to bring cheers to the market participants as they expected a steeper fall.
After causing some initial jitters, international crude oil prices cooled off a bit during the week. Though they are off the highs of more than $60 per barrel, but markets are still concerned about insufficient supply to meet the approaching winter.
The rupee ended the week marginally stronger, on the back of robust FII inflows and a decline in the crude oil prices. At the end of the week, the Indian currency was trading at 43.53 per US dollar, stronger than the previous week's close of 43.56.
Tight liquidity put an upward bias on call rates. On Monday, they touched an intra-day high of 6-6.20 per cent. After remaining at higher levels steadily throughout the week, they finally signed off the week at 5.70-5.90 per cent on Thursday. Call rates were not quoted on Friday as the RBI clearing operations remained closed.
At the repos/reverse repo auctions held on June 30, 2005, the RBI absorbed Rs 6,470 crore through 15 bids received at four-day reverse repo auction. It maintained the cut-off rate at 5 per cent. At the four-day repo auction, the RBI received 2 bids for Rs 575 crore, where it maintained the cut-off rate at 6 per cent.
As on June 30, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 508.98 crore and Rs 508.98 crore on a weighted average rate (WAR) of 5.60 per cent and 5.60 per cent, respectively.
The RBI has announced that it will conduct a price-based auction of 7.27 per cent 2013 paper for Rs 6,000 crore, and 10.25 per cent 2021 paper worth Rs 4,000 crore on July 5, 2005.
Outlook
Tight liquidity is expected to put an upward bias on the bond yields, ahead of the central government borrowing in the coming weak. However, market sentiment may improve after the auction. On other counts, positive outlook over FII inflows will provide some support to the rupee. Oil prices, however, will be closely watched by the traders.
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