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A Positive Week for Bond Traders

Bond markets reversed their four-week losing streak in the week ended September 2, 2005. The 7.38 per cent GOI 2015 bond shed four basis points since its last Friday's close

Bond markets ended their four-week losing streak to close on a positive note during the week ended September 2, 2005. The yield on the benchmark 7.38 per cent GOI 2015 bond shed four basis points since the last Friday's close to end at 7.04 per cent.

Among other developments during the week, inflation registered yet another decline. For the week ended August 20, 2005, inflation stood at 3.08 per cent. The RBI announced the auction of 5.69 per cent 2018 bond worth Rs 5,000 crore, and a new 30-year security for Rs 3,000 crore. The auction is scheduled to be held on September 8, 2005.

Bond markets had a dull start to the week, as the oil prices surged to touch $70 per barrel mark. Rakesh Mohan, Deputy Governor, RBI, commented that high crude oil prices posed a risk to inflation. Weakness of the Indian currency against the US dollar also raised concerns, as the markets witnessed little action on the first three days of the week.

However, the markets turned the table on Friday, as the US treasuries surged on expectations that the Fed Reserve may stop raising the interest rates further. A drop in the oil prices also helped.

Inflation for the week ended August 20, 2005, declined to 3.08 per cent, as against previous week's 3.13 per cent on fall in the prices of non-food items and some edible oils. The fall, however, was been less than expectations.

Oil prices surged to cross $70 per barrel mark on Monday. However, they came off the initial highs subsequently, but are still hovering around the $ 68 per barrel mark. The Indian government is likely to take a decision over the domestic fuel prices in the coming week. A hike in the prices of petrol and diesel in expected.

Rupee weakened to touch its eight-and-a-half month low of 44.13 per US dollar on Wednesday. A spike in the crude oil prices, and the greenback's strength against international currencies contributed to the Indian currency's decline. However, robust FII inflows later in the week helped to stem the slide, as the Rupee recovered to end the week below 44 per US dollar mark.

Call rates remained largely steady in the range of 4.95-5.05 per cent for majority of the week, before declining sharply on Friday to 1-2 per cent. Mounting selling pressure pushed the call rates down. As on September 1, 2005, the cumulative borrowing and lending figures in the call money market stood at Rs 12,181.97 crore and Rs 12,181.97 crore on a weighted average rate of 5.03 per cent and 5.03 per cent, respectively.

Outlook

A hike in the domestic fuel prices, if announced, may trigger concerns over inflation and a hike in interest rates in the next policy review. Therefore, traders are expected to tread cautiously ahead of the government's decision on the same. Traders would also look forward to the results of the gilt auctions worth Rs 8,000 crore scheduled in the coming week. Ample liquidity, though, is a big comforting factor.