Bond markets remained range-bound during the week ended October 21, 2005. Volumes remained low, as market participants preferred to wait for the credit policy review, which will be announced in the coming week. A sharp decline in the rupee to its 11-month low also worried the bond markets. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.17 per cent, up four basis points from last Friday's close of 7.13 per cent.
The mood remained subdued throughout the week. While the gilt yields inched up marginally on Monday, they surged on Tuesday as the rupee declined to below 45 per US dollar levels in the early trades. The yield on the 7.38 per cent GOI 2015 bond added four basis points to end at 7.18 per cent. Though the intervention by the central bank helped to stem the decline of the Indian currency, traders were worried that the action of the RBI will drain the liquidity out of the system. Thereafter, bonds moved in a narrow range. Sentiments improved a bit on Friday after the comments of the Finance Minister that the inflation is moderate and is driven primarily by the higher fuel prices. On the back of these comments, traders felt that the central bank may avoid raising interest rates in the coming policy review.
For the week ended October 8, 2005, inflation rose to 4.62 per cent, as against previous week's 4.24 per cent. The rise came on the back of higher food and manufactured product prices.
The weakness of rupee worried the bond markets during the week. The rupee breached the 45 per US dollar mark on Tuesday to decline to its 11-month low. The greenback's strength overseas and expectations of outflows of foreign funds from the stock market weighed heavily upon the Indian currency. However, intervention by some public sector banks, along with the weaker dollar towards the end of the week, provided support to check the decline.
Crude oil prices rose in the earlier part of the week. However, they receded later as the threat of Hurricane Wilma causing damage to the oil rigs in the Gulf of Mexico subsided. By the end of the week, the brent crude was quoting at $57.36 per barrel. Call rates remained steady in the range of 5-5.10 per cent throughout the week.
Outlook
Market participants would eagerly await the quarterly policy review to be held on October 25, 2005. The expectations of a rate hike have been strong. But after the comments of the Finance Minister that inflation is still moderate, traders are hoping that the RBI might not raise the rates this time. Apart from the policy review, markets will also keep a close track of the movement of rupee to take further direction.
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