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Oil Worries Bond Traders

The yield on the benchmark 7.38 per cent GOI 2015 bond moved in a narrow range before ending at 7 per cent on Friday, up four basis points from its previous week's close

Bond markets remained range-bound during the week ended August 5, 2005. The yield on the benchmark 7.38 per cent GOI 2015 bond moved in a narrow range before ending at 7 per cent on Friday, up four basis points from its previous week's close.

Bond market participants derived comfort from the comfortable liquidity position during the week. However, the rising crude oil prices and a surge in the US treasuries yields prevented the bond markets from making any significant gains. On Thursday, Bank of England cut the interest rates by a quarter of a per cent. Oil prices also registered a marginal decline. However, market sentiments remained cautious ahead of any announcement regarding the scheduled Rs 8,000 crore gilt auction. Oil prices rebounded on Friday past the $60 per barrel mark to cause worries to the traders. After the market hours, the government announced the auction of 8.07 per cent 2017 bond worth Rs 5,000 crore and 7.50 per cent 2034 bond worth Rs 3,000 crore to be held on August 11, 2005.

Inflation, for the week ended July 23, 2005, dropped to its two year low of 4.07 per cent, as against previous week's 4.18 per cent. A fall in the prices of food items helped it to register a drop of 11 basis points. However, the decline in the inflation failed to lift the sentiments of the bond market participants.

Oil prices remained the biggest cause of worries to the bond market participants. Oil prices remained at higher levels throughout the week, and no respite can be foreseen in the near future. Iran's deputy oil minister stated that oil prices may escalate to $70 per barrel by the end of the year.

Rupee traded steady during the week, on the back of robust FII inflows and euro's gains against the dollar. However, oil related dollar demand amid rising crude oil prices weighed heavily upon the Indian currency. By the close of trading on Friday, rupee was quoting at 43.50 per US dollar.

Call rates remained quite volatile during the week before ending at 2.50-3.50 per cent on Friday. They zoomed to 5.80-6 per cent on Wednesday amid last minute covering by some banks, and touched the weekly low of 2-3 per cent on the very next day. Broadly, the liquidity remained comfortable throughout the week.

As on August 4, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 7763.23 crore and Rs 7763.23 crore on a weighted average rate of 4.94 per cent and 4.94 per cent, respectively.

Outlook

Bond yields might inch up in the coming week. With crude oil prices at higher levels, market participants may prefer to stay on the sidelines. Moreover, traders may abstain from taking any fresh positions in order to make room for the forthcoming gilt auction worth Rs 8,000 crore, scheduled to be held on August 11, 2005. Therefore, we might witness another dull week for the bond markets.