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Caution Prevails On Bond Street

A sharp decline in the rupee worried the market participants during the week. However, cancellation of the gilt auction brought some respite to the markets

Bond markets remained dull throughout the week ended October 14, 2005. A sharp decline in the rupee, coupled with heightened expectations of a rate hike in the forthcoming policy review kept the bond markets from making significant gains. The volumes also remained low as traders preferred to stay on the sidelines. A higher than expected inflation did not help the markets' cause either. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.13 per cent, down 5 basis points from last Friday's close of 7.18 per cent.

The only source of comfort for the market participants during the week was the cancellation of the bond auction. The RBI announced the cancellation of the Rs 4,000 crore bond auction scheduled for next week. The announcement, which came after the trading hours on October 13, 2005, cheered the markets as they opened in green the next day, to end the week on a positive note.

Earlier, the bond markets started off the week on a cautious note on Monday. A sharp fall in the rupee hit the sentiments of market participants hard, as it heightened the expectations of a hike in interest rates. Caution prevailed in the markets, though some late buying on Tuesday helped the gilts recover a bit. Though the rising US treasury yields and firm crude oil prices contributed to the worries, but the announcement of the cancellation of the bond auction by the RBI brought some respite to the markets as they ended the week in the positive territory on Friday. However, a higher than expected inflation kept the gains under check.

For the week ended October 1, 2005, the inflation rose to 4.24 per cent, as against previous week's 3.97 per cent. The rise was higher than the expectations of the market. Costlier vegetables, other food items and manufactured products contributed to the rise.

Rupee registered a sharp decline during the week to touch its ten-month low of 44.94 per US dollar. Oil related dollar demand and the greenback's strength against the yen continued to weigh heavily upon the Indian currency. However, the rupee managed to recover marginally on Friday.

Call rates hovered around 5-5.10 per cent for the majority of the week. However, they declined sharply to 2-3 per cent on Friday as the demand for funds remained low amid ample supplies.

Outlook
The next big trigger for the bond markets will be provided by the quarterly policy review. The traders will look for further cues on the likelihood of a hike in reverse repo rates, though the expectations are already very high. We can expect another dull week for the bond markets as the market participants are likely to refrain from taking huge positions. As a result, the yields may remain range bound.