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Bond Markets in Red

The CRR hike weighed heavily upon the sentiments as the bond price declined over the week. The yield on the benchmark GOI 2016 7.59 per cent bond rose a substantial 25 basis points over the week

Bond markets ended the week in red. The CRR hike announced at the end of the last week had its impact on the market sentiments as the yields rose sharply over the week. The yield on the benchmark GOI 2016 7.59 per cent bond rose a substantial 25 basis points over the week.

After the closing hours on last Friday, December 8, the RBI had announced a hike in the cash reserve ratio. The CRR will be increased in two equal steps on December 23, 2006 and January 6, 2007 by 25 basis points each to 5.50 per cent.

This change in CRR has come after two years. And its impact on the bond markets was visible on the very first trading day this week. The yield on the 10-year GOI 2016 7.59 per cent bond shot up by 15 basis points on Monday. The mood remained pretty much the same throughout the week, except Friday. A lower-than-expected inflation brought some respite and alleviated some of the concerns over further tightening by the central bank. As a result, the yield on the 10-year GOI 2016 7.59 per cent bond eased off a bit to end at 7.64 per cent, down from the week's high of 7.68 per cent.

For the 12-month period ending December 2, 2006, the inflation stood at 5.16 per cent, lower than previous week's 5.30 per cent. A decline in the prices of food products was the major contributor to the drop in inflation.

Liquidity crunch was evident from the sharp rise in the overnight call rates. The call money rates surged to 8.10-8.20 per cent by the end of the week, substantially higher that last week's close of 6.10-6.20 per cent.

Outlook
While a decline in inflation provided some consolation to the market participants, the mood remains subdued on bond street. The corporate tax outflow of Rs 30,000 crore this month is likely to push the yields further up. Moreover, expectations of a hike in short-term interest rates in the January policy review will not help the sentiments either.