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Oil Continues to Bother Bond Markets

Bond markets ended yet another weak in the negative territory. Continued surge in the global crude oil prices countered a more than expected fall in the inflation, and a good response to the twin auction

Bond markets ended yet another weak in the negative territory. Continued surge in the global crude oil prices countered a more than expected fall in the inflation, and a good response to the twin auction held by the RBI, as the markets remained range-bound during the weak. The yield on the benchmark 7.38 per cent GOI 2015 bond rose by four basis points over the week to end at 7.07 per cent, as against previous Friday's close of 7.03 per cent.

On August 18, 2005, the RBI conducted a twin auction worth Rs 8,000 crore. The RBI set a cut-off price of Rs 102.11 for the auction of 7.37 per cent 2014 bond worth Rs 5,000 crore, and a cut-off price of Rs 99.44 for 7.50 per cent 2034 bond worth Rs 3,000 crore. The auctions received a good response as both the bonds were fully sold.

The yields spiked up on Tuesday, following a surge in the crude oil prices. The yield on the 7.38 per cent GOI 2015 bond rose by five basis points to end at 7.08 per cent. On Thursday, the markets recovered marginally, as the gilt auctions received good response from the markets. But the markets could not make substantial gains, as the bonds ended flat on Friday. A decline in the inflation failed to have much impact, as the traders treaded cautiously over high oil prices.

Inflation for the week ended August 6, 2005 dropped to its 30-month low of 3.35 per cent, as against previous week's 3.84 per cent. The decline came on the back of fall in food and energy prices.

Oil prices maintained at higher levels throughout the week, forcing the market participants to tread cautiously. A good auction result, and a fall in the inflation failed to uplift the market sentiments as the oil continued to play the spoil-sport. Intra-week, the crude oil prices registered a marginal decline, but are still hovering around $64 per barrel mark.

Rupee remained range-bound during the week. Though the Indian currency gained some strength in the initial part of the week, it lost some ground on Friday, as the US dollar strengthened against the major international currencies. At the end of the week, rupee was quoting at 43.58 per US dollar.

Call rates remained steady in the range of 4.90-5.05 per cent, before rising sharply on Friday to end the week at 5.50-5.75 per cent. As on August 18, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 7,758.57 crore and Rs 7,758.57 crore on a weighted average rate of 5 per cent and 5 per cent, respectively.

OutlookM

With no government borrowing scheduled for the coming week, the liquidity position should remain comfortable in the bond markets. But market participants may refrain from building positions until the oil prices recede. Hence, we may witness a dull start to the week ahead. The markets will take direction with the movement of the oil prices.