VR Logo

Oil, Inflation Bother Bond Investors

There was no respite for the bond investors during the week ended July 8, 2005. Spurt in the international crude oil prices, the central government auction and a higher than expected inflation bothered the markets

There was no respite for the bond investors during the week ended July 8, 2005. Spurt in the international crude oil prices, the central government auction and a higher than expected inflation bothered the markets.

Over the week, the yield on the popularly traded 2015 GOI 7.38 per cent bond rose sharply before closing at 7.18 per cent. Bearish cut-offs set by the RBI at the twin auction hurt the market sentiments. In the twin auction worth Rs 10,000 crore held on July 5, 2005, the RBI set a cut-off of Rs 101.26 and Rs 124.57 for the 7.27 per cent 2013 bond and 10.25 per cent 2021 bond, respectively. A surge in the US treasuries also had an impact on the markets. Oil prices remained a cause of concern throughout the week. Along with this, a higher than expected inflation figure, as released on Friday, rounded off a pretty depressing week for the bond markets.

For the week ended June 25, 2005, inflation stood at 4.14 per cent, as against previous week's 4.10 per cent. In contrast, markets were expecting the inflation to drop to 4 per cent level. Costlier petrol, diesel and food products pushed inflation upwards.

After showing some signs of cooling off late in the previous week, the oil prices bounced back with full force to cause major concerns for the bond markets. Crude oil maintained a rising trend throughout the week, before ending at $59.70 on Friday. Thursday was the only day when oil prices eased off just a bit, after a series of blasts rocked the city of London.

Rising dollar in the wake of blasts in London and high crude oil prices weakened the rupee against the greenback during the week. The Indian currency looked stable around 43.57 per US dollar level during the initial days of the week. However, blasts in London propelled buying activity in dollar, which weakened the rupee sharply, as it closed at 43.64 on Thursday.

Liquidity remained comfortable during the initial part of the week, as the supplies matched the requirement of funds. On Wednesday, the RBI rejected bids at the 91-day T-Bills auction to maintain adequate liquidity in the system. However, some late borrowing pressure pushed the call rates up to 5.50-5.70 per cent by the end of the day on Friday.

At the repos/reverse repo auctions held on July 8, 2005, the RBI absorbed Rs 5,800 crore through 16 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.

Outlook

Oil continues to remain a major concern. Further, the forthcoming auctions worth Rs 50,000 crore will also impact the bond markets sentiments. However, amid cautious sentiments, the markets will derive some comfort from the expectations of the flow back of cash into the system in the coming days, that went out through advance tax payments.