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Calm on Bond Street

Cautious sentiments prevailed in the bond markets ahead of the forthcoming quarterly credit policy review. Bonds remained flat during the week ended January 20, 2006

Cautious sentiments prevailed in the bond markets ahead of the forthcoming quarterly credit policy review. Bonds remained flat during the week ended January 20, 2006. The yield on the benchmark 7.38 per cent GOI 2015 bond ended at 7.10 per cent, unchanged from its previous week's close.

A fall in the call money rates saw the bonds post marginal gains in the earlier part of the week. However, the gains were checked by the concerns over the forthcoming credit policy review. Subsequently, the markets pared off the gains made initially in the week as a surge in the crude oil prices caused anxiety to the market participants. The rise in the oil prices triggered concerns over inflation. Many of the traders expect the central bank to keep the interest rates unchanged, though the sentiments remained cautious.

Inflation registered a decline. For the 12-month period ending January 7, 2006, it stood at 4.24 per cent, lower from the previous week's 4.4 per cent. Currently, it is lower than the 5 per cent inflation rate that the government is factoring in by the end of the year.

Rupee traded weaker against the US dollar in the initial part of the week, before pulling things back a bit towards the end. Strong dollar demand by the oil-importing companies, coupled with the euro's weakness against the greenback put pressure on the India currency. But the losses were stemmed by the robust foreign inflows in the Indian markets. By the end of the week, the rupee was trading at 44.36 per US dollar. Call rates eased off over the week to end at 6.40-6.60 per cent, as against previous week's close of 7.50-7.75 per cent. The Reserve Bank of India pumped in large sums of money into the system through the repos. However, the call rates are still at their higher levels.

Outlook
All eyes are now set on the third quarterly credit policy review which will be announced by the RBI on January 24, 2006. The markets will take further direction only once the central bank's stand on the interest rates will become clear in the review. Although there are expectations of the interest rates to remain unchanged, but things will become clear only in the coming days.