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Minor Recover in Bond Markets

The yield on the benchmark 7.38 per cent GOI 2015 bond shed two basis points over the week to end at 7.09 per cent, as against last week's close of 7.11 per cent

Bond markets recovered marginally during the week ended January 6, 2006. The yield on the benchmark 7.38 per cent GOI 2015 bond shed two basis points over the week to end at 7.09 per cent, as against last week's close of 7.11 per cent. Sentiments improved with the improvement in liquidity position. Trading volumes also increased as compared to the last two weeks.

Among the major developments during the week, the RBI announced that the twin auction worth Rs 10,000 crore will be held on January 9, 2006. The central bank will auction 9.39 per cent 2011 GOI bond worth Rs 6,000 crore and 7.40 per cent 2035 GOI bond worth Rs 4,000 crore.

The yields moved in a narrow range during the week. Bond markets started off the year 2006 on a positive note. The yields on the bonds dropped with the signs of improvement in liquidity. There were, however, mixed news flows on Tuesday. While the liquidity continued to improve, but a source said to be close to the RBI stated that a heightened monetary expansion witnessed by the economy can trigger inflationary pressures, if a timely action is not taken. This raised the level of concern of market participants. Gains posted by the US treasuries supported the bond markets well on Wednesday, though the announcement of the gilt auction weighed upon the sentiments. The markets remained range-bound thereafter without making any significant gains. The sentiments are expected to remain wary ahead of the twin auction, though traders largely believe that it will go through comfortably without putting much pressure upon the liquidity.

Inflation remained benign. For the 12-month period ending December 24, 2006, inflation stood at 4.40 per cent, lower than previous week's 4.62 per cent. However, it failed TO have a significant impact on the markets. The decline came primarily on account of lower prices of food and manufactured items.

Rupee continued to strengthen during the week. Buoyed by the dollar's weakness against the Asian currencies, coupled with continuing FII inflows in the domestic markets, the Indian currency surged to close at its three-month high of 44.66 per US dollar by the end of the week. The central bank had to intervene to curb the rising rupee.

A decline in the call rates marked the improved liquidity in the system. Call rates decline sharply to touch their weekly low of 5.45-5.55 per cent on Wednesday, before rising marginally to end at 5.80-5.90 per cent.

All eyes are now set on the forthcoming twin gilt auction worth Rs 10,000 crore to be held early in the coming week. The traders are expected to refrain from taking huge positions ahead of the auction, and therefore, we may witness a cautious start to the coming week. Though the auction is expected to sail through comfortably, but the traders will wait to gauge its impact on the liquidity.