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No Action on Bond Street

Bond markets remained subdued during the week ended May 26, 2006. The yield on the popularly traded 7.59 per cent GOI 2016 bond remained rang-bound before ending at 7.61 per cent

Bond markets remained subdued during the week ended May 26, 2006. The yield on the popularly traded 7.59 per cent GOI 2016 bond remained rang-bound before ending at 7.61 per cent, up one basis point from last week's close of 7.60 per cent. Traders refrained from taking huge positions as the volumes in the wholesale debt markets (averaging Rs 530 crore) remained thin throughout the week.

A steep fall in the equity markets raised concerns about the weakening of foreign fund inflows, thus impacting rupee. The traders worried that the central bank may start buying rupee in order to stem its decline against the dollar and this would suck the liquidity from the market. The auction of the 15-year GOI bond worth Rs 5,000 crore, conducted by the RBI on May 23, went smoothly.

A higher than expected rise in inflation also contributed to the weak sentiments. For the one-year period ending May 13, 2006, inflation stood at 4.32 per cent, higher than previous week's 3.96 per cent. Costlier vegetables, pulses and some manufactured goods contributed to the rise. Market participants are also concerned about the inflationary impact of the expected hike in the domestic fuel prices. The crude oil has been trading higher around $71 per barrel mark.

Rupee slipped against the US dollar during the week. Heavy dollar demand by oil importers and weak foreign fund flows pushed the Indian currency in red. Traders believe that the central bank has been buying the rupee to stem its slide. At the end of the week, rupee was trading at 45.85 per US dollar.

Call rates remained flat to end unchanged from previous week's close of 5.50-5.60 per cent. Sufficient liquidity in the system enabled the markets to absorb the bond issue worth Rs 5,000 crore comfortably.

Outlook
Bond markets are expected to tread cautiously at the start of next week. The traders will take cues from the equity markets and the flow of foreign funds, which can have a significant impact on rupee. The markets will also look forward to any announcement regarding the fuel price hike, which can set the direction going forward.