Bond markets remained range-bound before closing marginally weaker during the week ended December 02, 2005. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.10 per cent, up one basis point from its previous week's close of 7.09 per cent.
Among the major developments, a second daily auction under the liquidity adjustment facility (LAF) was introduced, which has been taken positively by the markets, as it will enable banks to manage liquidity in a better way. The RBI also announced that it will conduct the auction of 8.07 per cent 2017 bond worth Rs 5,000 crore and 7.40 per cent 2035 bond worth Rs 3,000 crore on December 6, 2005. As per the data released on November 30, 3005, the economy grew at the rate of 8 per cent during the quarter ended September 2005, which was higher than the market expectations.
Bond markets started off the week on a positive note. The introduction of a second daily auction under LAF, comfortable liquidity and easing crude oil prices all contributed to the positive sentiments. The story continued on Tuesday as well. A drop in the yields of US treasuries provided further support to the markets. However, the trend reversed on Wednesday, as a higher than expected growth rate of economy (8 per cent) during the quarter ended September 2005 triggered expectations of further increases in the interest rates in times to come. After ending flat on Thursday, the bonds lost further ground on Friday as the rebounding crude oil prices caused some concerns. However, a lower than expected inflation brought some respite to the markets.
For the week ended November 19, 2005, inflation stood at 4.32 per cent, up from previous week's 4.2 per cent. However, it was still lower than the market expectations. Higher prices of textiles, tobacco and paper contributed to the rise.
The rupee declined against the US dollar during the week to touch a 14-month low as the traders bought the greenback to capitalise on an arbitrage against a costlier dollar in the offshore forwards market. By the end of the week, the Rupee had crossed the 46 per dollar mark. Apart from that, higher demand for dollar from the importers during the month-end also contributed to the weakness.
Call rates remained range-bound before ending at 5.25-5.35 per cent, as the liquidity position remained comfortable.
Outlook
The markets are gearing up for the forthcoming twin auction worth Rs 8,000 crore. Response to the auction, and its effects on liquidity will play a key role in determining the market direction. Traders will also closely track the movement of the Rupee, which has significantly declined during the concluded week.
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