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Bond Markets in the Red

The yield on the popularly traded 8.07 per cent GOI 2017 bond rose by a massive 17 basis points, before ending at 7.55 per cent on Friday

Bond markets lost ground during the week ended March 31, 2006. The yield on the popularly traded 8.07 per cent GOI 2017 bond rose by a massive 17 basis points, before ending at 7.55 per cent. Liquidity concerns and expectations of a rate hike in the next quarterly review bothered the market participants.

Bond markets started off on a weak note on Monday. The yield on the benchmark 8.07 per cent GOI 2017 bond rose by 4 basis points to end the day at 7.43 per cent. Earlier, the yields had declined a bit as there were expectations that the central bank might reduce the cash reserve ratio (CRR) to counter the tight liquidity conditions. But some comments from the deputy governor of RBI turned the sentiments jittery and the market participants doubted whether the RBI would take any action in regard to CRR. The markets remained flat on Tuesday as the traders preferred to stay on the sidelines ahead of the FOMC meet to decide the Fed rate. Bonds lost further ground on Wednesday after the Federal Reserve announced a hike in the Fed rate from 4.50 to 4.75 per cent, and also indicated towards further hikes in times to come. This has led to speculation that taking cues from the Fed rate hike, the RBI may also hike the short term rates in the next quarterly policy review. There was no let off on Friday either as the concerns over higher crude oil prices and the forthcoming gilt auction pushed the bond markets further in the red.

A decline in the inflation though came as a consolation. For the 12-month period ending March 18, 2006, inflation stood at 4.06 per cent, down from previous week's 4.28 per cent. Cheaper vegetables and some other food items contributed to the decline.

Rupee remained range-bound during the week as strong foreign fund inflows were countered by the RBI intervention to prevent the Indian currency from appreciating. At the end of the week, the Indian currency closed at 44.61 per US dollar.

Liquidity conditions have been bothering the market participants. Call rates declined a bit in the initial part of the week but rose sharply towards the end to close at 6.70-6.90 per cent on Friday. This is higher than the last week's close of 6.50-6.70 per cent.

With the uncertainty over the cash reserve ratio and the forthcoming twin gilt auction, traders are likely to tread cautiously at the start of the next week. The RBI will auction securities worth Rs 8,000 crore in the first gilt auction of the financial year which is scheduled to be held between April 3- 12, 2006. Any announcement in regard to the same may decide further direction for the bond markets.