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Recovery in Bond Markets

The yield on the popularly traded 8.07 per cent GOI 2017 bond shed 15 basis points over the week to end at 7.35 per cent

Bond markets firmed up during the week ended February 3, 2006. After a slide in the last week, the bonds staged a recovery. The yield on the popularly traded 8.07 per cent GOI 2017 bond shed 15 basis points over the week to end at 7.35 per cent.

Among the major developments during the week, FOMC raised the Fed funds rate by another 25 basis points, from 4.25 per cent to 4.50 per cent. In the domestic markets, the RBI announced that it will conduct the twin gilt auction worth Rs 6,000 crore on February 7, 2006. After much speculation as to whether the central bank would cancel the auction or not in the wake of tight liquidity conditions, the RBI finally announced its decision to go ahead with it, though it reduced the borrowing amount. As per the auction calendar, the twin auction was supposed to be worth Rs 9,000 crore.

Gilt markets opened the week on a positive note as some buying was witnessed after the significant fall in the last week. An improvement in liquidity conditions also encouraged the market participants. However, the gains were checked by the uncertainty over the gilt auction and the FOMC meet, which was to be held on Tuesday. However, the markets turned bearish on Thursday on the back of a rise in the US treasury yields. But the announcement of lower than scheduled borrowing in the gilt auction brought some respite to the markets as they inched up on Friday.

Inflation rose to 4.51 per cent for the 12-month period ending January 21, 2006, marginally higher than previous week's 4.40 per cent. Costlier manufactured items contributed to the rise.

The rupee remained range-bound in the initial part of the week, ahead of the Fed meet. But subsequently, the Indian currency weakened a bit as the greenback surged against the major currencies. By the end of the week, rupee was trading at 44.23 per US dollar.

Liquidity showed signs of improvement and the call rates eased off a bit to closed at 6.40-6.60 per cent on Friday, as against previous week's close of 7.60-7.80 per cent. However, the forthcoming gilt auction might put some pressure upon the liquidity.

Outlook
The markets have cheered the RBI's decision to borrow less than the scheduled Rs 9,000 crore. But at the start of the next week, the markets may show signs of nervousness, amid concerns over the outflows towards auction payments. Therefore, we can expect a cautious start to the next week.