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A Dull Week For Bond Traders

The yields on gilts moved in a narrow range. Volumes on the wholesale debt market also remained relatively low, averaging Rs 1,630 crore during the week

Bond markets remained dull during the week ended August 26, 2005. The yields on gilts moved in a narrow range and the volumes on the wholesale debt market also remained relatively low, averaging Rs 1,630 crore during the week. A fall in the inflation to its 34-month low failed to have much impact as high oil prices kept the pressure up, causing worries to the market participants. The yield on the benchmark 7.38 per cent GOI 2015 bond ended the week at 7.08 per cent, up one basis point from its last Friday's close of 7.07 per cent.

On August 25, 2005, the RBI conducted the auction of 11.9 per cent GOI 2007 bond worth Rs 6,000 crore under the market stabilisation scheme (MSS), to check the surplus liquidity in the system. The RBI set the cut-off price of Rs 109.59 at the auction.

The yields edged up earlier in the week as the crude oil prices touched $68 per barrel mark. Moreover, traders were concerned over the expectations of a hike in the domestic fuel prices, which will reverse the declining trend of inflation. Government's announcement of auction worth Rs 6,000 crore to drain the liquidity also contributed to the cautious sentiments that prevailed in the markets. The yield on the benchmark 7.38 per cent GOI 2015 bond inched up to touch its weekly high of 7.10 per cent on Wednesday. However, a decline in the yields on the US treasuries provided some succour to the bond markets, as they posted marginal gains on Friday, to cover the losses posted earlier in the week.

Inflation for the week ended August 13, 2005 registered another decline to its 34-month low of 3.13 per cent, down from previous week's 3.35 per cent. A fall in the prices of oilseeds, minerals and manufactured products contributed to a lower inflation figure. However, it did not have much impact on the markets even though the decline was more than expectations.

Oil prices spiked up during the week to touch $68 per barrel. Supply concerns were evoked as a hurricane named Hurricane Katrina threatened to disrupt the rigs in the Gulf of Mexico. An estimate suggests that crude oil production of around 6 million barrels has already been disrupted by storms in the Gulf of Mexico so far this year.

Rupee lost ground against the dollar during the week, as the greenback gained strength against all major currencies. Demand for dollar from corporates and oil companies also contributed to the weakness of the Indian currency.

Call rates remained steady in the range of 4.90-5.05 per cent for most part of the week, as the liquidity remained comfortable. As on August 25, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 10,003.77 crore and Rs 10,003.77 crore on a weighted average rate of 5.03 per cent and 5.03 per cent respectively.

Outlook

With the markets expecting an announcement on the hike in the domestic fuel prices shortly, the traders may abstain from building up positions early in the week. The markets may take direction once things become more clear on the hike in domestic fuel prices. Meanwhile, ample liquidity is expected to provide support to the markets and keep losses in check.