Bond markets ended in the negative territory for the week ended September 23, 2005. The yield on the popularly traded 7.38 per cent GOI 2015 bond inched up by four basis points during the week to close at 7.06 per cent. Fears of disruptions due to Hurricane Rita led to a spurt in the crude oil prices. Concerns raised by the hurricane, at a time when markets were barely recovering from the Katrina aftermath, hit the market sentiments. Higher than expected rate of inflation also contributed to the weakness of the markets.
Among other developments during the week, the government announced its plans to borrow Rs 58,000 crore during the second half of the current fiscal through bond issuance. The announcement was largely in line with market expectations. The Federal Reserve hiked its fund rate by another 25 basis points to 3.75 per cent.
Bond markets started the week on a positive note. Gilt yields registered a decline on the back of comfortable liquidity on Monday. The markets remained range-bound during the next two days, as the traders awaited the announcement of fed rates. A spike in the crude oil prices also worried the market participants.
The last two days of the week turned out to be quite tough for the bond markets. Yields shot up on Thursday, as the crude oil touched $68 per barrel. Hurricane Rita threatened to disrupt oil and gas infrastructure. The yield on the popularly traded 7.38 per cent GOI 2015 bond closed at 7.05 per cent, up a massive 5 basis point in a single trading day. The markets extended their losses on Friday. Although Hurricane Rita lost some intensity, but a higher than expected rate of inflation and tight liquidity kept the markets from recovering.
Inflation rose to 3.53 per cent in the year ending September 10, 2005, up from the previous week's 3.16 per cent on back of higher fuel and food prices. Traders fear that the spurt in inflation might force the banks to raise interest rates.
Oil-related worries were back to haunt the bond markets during the week. Fears of disruptions due to Hurricane Rita escalated the oil prices to $68 per barrel. Though the weakening of the hurricane caused the oil prices to register a decline, but they are still at higher levels and the concerns are not over yet.
Rupee traded weak against the US dollar during the week. A hike in the Fed rates, coupled with a slide in the stock markets, led to speculations of a slowdown in the FII inflows. However, talks about China adjusting the Yuan's trading band against non-dollar currencies to 3 per cent from the current 1.5 per cent, helped the rupee recover a bit. By the end of the week, the Indian currency was quoting at 43.91 per US dollar.
Call rates remained in the higher range of 5-5.15 per cent during the week, as the advance tax outflows put pressure on the liquidity in the system. The call rates ended at 5.10-5.20 per cent on Friday.
Outlook
Bond market participants would closely track the oil price movement. Though Hurricane Rita has showed signs of losing intensity, but the concerns are not over yet. Bond markets may witness a cautious start to the coming week. On September 27, 2005, the RBI will auction 10-year State Development Loans 2015 worth Rs 839.420 crore on behalf of six state governments. This may put pressure on the liquidity.
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