The worst might just be over for the bond markets with no signs of last week's volatility. Traders seem to have come to terms with the initial shockwaves that the CRR hike created in the market. The yield on the benchmark GOI 2016, 7.59 per cent remained range bound ending the week on Friday, December 22, 2006 at 7.6 per cent. This is still 21 basis points higher than the yields before the CRR hike was announced on December 8, 2006. The recovery from last week's mayhem has been 4 basis points.
Sentiments were governed by the tight liquidity conditions prevalent in the market with call rates touching record highs, helped by the outflows on account of advance tax payments as well as the new CRR guidelines which will be effective from December 23, 2006. Call money rates ended the week 100 basis points higher at 9.00 - 9.25 per cent on December 22, 2006. This was inspite of the RBI pumping in huge amounts of cash to meet the shortage of funds with banks. Inflation data didn't help matters with rising indicators at 5.32 per cent up from last weeks favourable 5.16 per cent. The reading is still within the targeted 5.0 - 5.50 per cent range for the fiscal ending in March 2007. At the same time the rising crude prices further dampened sentiments.
State run banks proved to be the messiahs in the market, with active buying from them to meet regulatory requirements successfully containing losses. The data on US housing index sent out positive vibes, with expectations of the Federal Reserve reducing rates next year.
Outlook
With a dearth of good news in the bond market; bond yield levels as witnessed in the first week of December, will remain a distant memory. The CRR hike needs to be seen in perspective of containing runaway inflation on the back of a robust growth rate. The next step by the central bank is likely to be seen in the repurchase agreements market. Also the outcome of the amendments to the Banking Regulation Act under consideration in the parliament will be awaited eagerly with a likely reduction in the SLR which could result in excess funds with banks and a subsequent relaxation of the current liquidity crunch.
In the coming week tight liquidity in the markets is bound to rule sentiments with the new CRR requirements taking effect from Saturday, December 23, 2006. The second hike in CRR will take effect on January 6, 2007 and given the response as witnessed on Friday, December 22, 2006 one can expect call rates to continue their uphill trek unless the central bank does something different again.
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