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Bond Markets Make Merry

With the RBI unexpectedly keeping the short-term rates unchanged, the mood on bond street was upbeat through the week. The yields declined significantly as the bond surged

Bond markets made merry during the week ended April 21, 2006, as the RBI unexpectedly kept the short-term rates unchanged. The yields declined significantly as the bond surged.

In the policy review announced on April 18, the RBI kept the Reverse Repo Rate unchanged at 5.5 per cent, as against wide expectations of a 25 basis points hike to 5.75 per cent. Bank Rate, Repo Rate and Cash Reserve Ratio were also kept unchanged. But the central bank also cautioned that factors like higher oil prices will have to be closely watched. GDP has been projected to grow at 7.5-8.0 per cent for the fiscal year 2006-07.

Bond markets started off cautiously on Monday as the traders refrained from taking positions ahead of the policy review. Volumes remained thin and high crude oil prices also strengthened the expectations of a rate hike. But all that changed on Tuesday as the announcement of the credit policy review brought a pleasant surprise. The yield on the popularly traded 8.07 per cent GOI 2017 bond shed seven basis points to end at 7.55 per cent. The trend continued on Wednesday as the yields continued to head southwards. The surge was stemmed subsequently by concerns over rising crude prices, which touched $74 per barrel on Thursday, and the announcement of the gilt auction. The RBI will conduct the auction of 7.40 per cent GOI 2012 bond worth Rs 6,000 crore and 7.95 per cent GOI 2032 bond worth Rs 4,000 crore on April 25, 2006.

Inflation continued to decline. For the week ended April 8, 2006, inflation stood at 3.24 per cent, lower than previous week's 3.51 per cent. Cheaper food items contributed to the decline.

Liquidity remained comfortable during the week and the call rates remained in the range of 5.50-5.60 per cent for the major part of the week. Traders are also expecting the forthcoming gilt auction to go through smoothly in the wake of comfortable liquidity conditions.

Outlook
Though the last week had been good for the bond markets, higher oil prices is a cause of concern and will be closely monitored. Apart from that, the markets will also look forward to the results of the gilt auction and its impact on the markets.