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Bond Markets Recover

Uncertainty over interest rates came to an end in the week ended October 28, 2005. Yield on the benchmark 7.38 per cent GOI 2015 bond shed eight basis points to end at 7.09 per cent

Bond markets ended in the positive territory during the week ended October 28, 2005, as the uncertainty over interest rates came to an end. In the credit policy review held on October 25, 2005, the RBI raised reverse repo rate by 25 basis points to 5.25 per cent, while keeping the bank rate and CRR unchanged at 6 and 5 per cent, respectively. The yield on the benchmark 7.38 per cent GOI 2015 bond shed eight basis points to end at 7.09 per cent.

The hike in the reverse repo rate, which was in line with market expectations, has been made to contain the rising inflation. However, the markets were a little surprised with a 25 basis points hike in the repo rate to 6.25 per cent, which now pegs it higher than the bank rate. The projections of the economic growth were revised to 7-7.5 per cent from the earlier 7 per cent for the fiscal year ending March 2006

After the credit policy review, the gilts maintained a positive bias mid-way during the week as the uncertainty was over. The RBI governor's comments that repo rate may revert back to the bank rate in the medium term also comforted the markets. However, the mood remained cautious as the traders awaited any announcement regarding the twin auction worth Rs 8,000 crore to be held in the coming week. Forthcoming FOMC meet, which decides upon the fed rates is also playing upon the sentiments. The markets ended weaker on Friday on the back of higher than expected inflation.

For the week ended October 15, 2005, the inflation rose to 4.71 per cent, as against previous week's 4.62 per cent. This was higher than the market expectations. The rise came primarily due to a rise in food, manufactured products and mineral prices.

Rupee ended flat at 45.09 per US dollar. The Indian currency made some gains after a hike in the interest rates, as it surged to breach the 45 per US dollar mark. But the month end dollar demand pushed the rupee back above the 45 per dollar mark by the end of the week. Call rates inched up during the week to end at 5.30-5.50 per cent as the demand for funds was slightly higher.

Outlook
With the speculation over interest rates behind, bond markets made some gains in the just concluded week. Going forward, markets are likely to tread cautiously at the start of the week as the traders would await the FOMC meet and the announcement regarding the twin auction worth Rs 8,000 crore. Though the auction, as and when it takes place, might put pressure on the liquidity, but the sentiments may get a boost if it meets with an encouraging response.