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Oil prices spook bond markets

Oil prices touched $66 a barrel and the US Fed raised rates by 0.25 per cent to 3.5 per cent. The yield on the benchmark security went up by 3 basis points

Bond markets finished the week ended August 12, 2005 on a weak note. A surge in the global crude oil prices caused major concerns to the market participants and contributed to the weak sentiments. However, ample liquidity in the system provided the much-needed comfort to the traders. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.03 per cent, up three basis points from previous week's close.

The RBI conducted gilt auctions worth Rs 8,000 crore on August 11, 2005. It set a cut-off price of Rs 107.17 at the 8.07 per cent 2017 bond auction worth Rs 5,000 crore, and a cut-off price of Rs 100.65 at the 7.50 per cent 2034 bond auction worth Rs 3,000 crore. Both the bonds were sold fully. The FOMC raised the Fed funds rate by a quarter per cent to 3.50 per cent on August 9, 2005. The hike was in line with expectations.

The yields surged in the initial part of the week, following a surge in the US treasuries yields to their four-month highs. A spike in the oil prices added to the worries, as the yield on 7.38 per cent GOI 2015 bond ended higher at 7.05 per cent on Tuesday. However, a drop in the oil prices the following day helped the bond markets to recover partly from the losses made on the first two days of the week. But that was short-lived as the oil prices resumed their upward movement, touching $66 per barrel mark on Friday. This put an upward bias on the yields. However, ample liquidity provided some comfort and helped to keep the losses in check.

Inflation, for the week ended July 30, 2005, dropped to 3.84 per cent, as against previous week's 4.07 per cent. Cheaper food items and manufactured products countered the rising fuel prices, as the inflation registered a decline.

Rising oil prices caused problems for the bond markets. Crude oil prices surged to touch $66 per barrel by the end of the week. The rising trend of the oil prices has raised concerns over inflation and intrerest rates going forward.

Rupee traded weaker against the US dollar throughout the week. Rising crude oil prices, coupled with RBI intervention exerted pressure on the Indian currency, as it touched a one-month low of 43.59 per US dollar during the ealry trading hours on Friday. However, strong FII inflows in the stock markets helped the rupee to restrict the downside.

Call rates remained range-bound, before ending at 4.95-5.05 per cent on Friday. As on August 11, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 8,065.11 crore and Rs 8,065.11 crore on a weighted average rate of 5 per cent and 5 per cent respectively.

Outlook

The outlook remains negative for the coming week. No respite on the oil front can be foreseen. Moreover, another twin auction worth Rs 8,000 crore, scheduled between August 16-23, 2005, may put an upward bias on the yields. However, ample liquidity in the system is the only source of comfort, and it may help to restrict losses in the coming week.