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Caution Rule Bond Street

Bond markets remained cautious during the week ended June 30, 2006. After last week's surge, the yield on the benchmark 7.59 per cent GOI 2016 bond ended at 8.12 per cent, up one basis point

Bond markets remained cautious during the week ended June 30, 2006. After last week's surge, the yield on the benchmark 7.59 per cent GOI 2016 bond ended at 8.12 per cent, up one basis point from its last week's close.

After the last week's slide, bond markets opened on a jittery note. Volumes remained low. Traders were wary of taking huge positions ahead of the US Fed meet. There are also expectations of a hike in the short-term interest rates in the domestic markets in the forthcoming policy review.

Mid-way during the week, the yield on the 10-year bond touched a high of 8.13 per cent. But subsequently, a couple of positive developments helped the bonds to recover marginally. Though the Fed raised short-term rates by a quarter per cent as per expectations, but the Fed Chairman's comments have been taken positively. Market participants are now expecting that the Fed may bring an end to the rate hikes.

Traders are also hoping that the government will reduce the size of the forthcoming gilt auction. The RBI is scheduled to conduct twin auction worth Rs 10,000 crore between July 3 and 11. In the last auction held on June 22, the government had unexpectedly increased the auction size from Rs 5,000 crore to Rs 9,000 crore. However, it was clarified that the additional borrowing amount would be adjusted from the remaining auctions for the year.

Inflation registered a rise for the third week in a row. For the 12-month period ending June 17, 2006, inflation stood at 5.44 per cent, higher than previous week's 5.24 per cent. Costlier fuel and food articles continued to push it higher.

Rupee ended stronger at 46.08 per US dollar. The Indian currency dipped initially on the back of dollar demand from importers and oil companies. But robust foreign fund flows and positive statements from the Fed chairman helped the rupee recover towards the end of the week.

Liquidity position was comfortable and the call rates remained in the range of 5.75-5.85 per cent throughout the week.