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Bond Markets Remain Inactive

Volumes were thin during the week as the traders remained on the sidelines. The yield on the benchmark 7.59 per cent GOI 2016 bond traded in a narrow range before ending at 7.79 per cent

Bond markets had a dull last week. Market participants preferred to stay on the sidelines and the volumes on the wholesale debt markets remained low (averaging below Rs 350 crore). The yield on the benchmark 7.59 per cent GOI 2016 bond traded in a narrow range before ending the week at 7.79 per cent, down two basis points from previous week's close of 7.81 per cent.

The sentiments remained bearish as the markets are expecting a rate hike in the credit policy review in the month of July. Last week, the RBI had unexpectedly raised the reverse repo rate by 25 basis points to 5.75 per cent. Traders anticipate that the central bank is likely to follow that up with another hike in the forthcoming policy review.

Midway during the week, traders hoped that the RBI may reduce the maturity of the gilt securities to be auctioned between June 15 and 24. The central bank was scheduled to auction a 15-19 year security worth Rs 5,000 crore. However, their hopes were dashed when the government announced that it would auction two bonds on June 22, 2006 worth a total of Rs 9,000 crore- the 7.37 per cent GOI 2014 bond worth Rs 5,000 crore and the 7.94 per cent GOI 2021 bond worth Rs 4,000 crore.

A higher than expected inflation also contributed to the weak sentiments. For the one-year period ending June 3, 2006, inflation stood at 4.72 per cent, higher than previous week's 4.68 per cent. Costlier fruits and vegetables contributed to the rise.

Rupee remained a bit volatile over the week. The Indian currency slipped against the US dollar initially due to weakness in the equity markets and dollar buying by the oil importing companies. However, foreign fund inflows towards the end of the week supported the rupee well as it ended at 45.92 per US dollar, unchanged from its previous week's close. Call rates remained in the range of 5.75-5.85 per cent throughout the week.

Outlook
Bond markets may start off the coming week on a weak note. Traders are expected to tread cautiously ahead of the twin gilt auction worth Rs 9,000 crore scheduled for June 22, 2006.