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Dashing All Hopes

Market sentiment turned bearish with the yield on the benchmark 7.59 per cent GOI bond settling at 7.9 per cent on January 12, compared to 7.55 per cent at the end of last week

All hopes of a market rally were dashed this week with the yield on the benchmark 7.59 per cent GOI bond rising 35 basis points during the week to settle at 7.9 per cent on January 12, compared to the 7.54 - 7.58 per cent range witnessed the week before (January 2 - January 5).

The week started on an upbeat note with the yield on the benchmark bond falling by 6 basis points on Monday, January 8 owing to the revision of the auction by RBI to Rs. 4,000 crore from the planned Rs. 9,000 crore.

But an inflation warning by the finance minister sent the market into a tizzy on Tuesday, dashing all hopes of resurgence in the bond markets.

As expected the bond market was vigilant for cues to the quarterly policy review to be announced by the end of the month.

Concurrent to this was an important development on the impending legislation granting greater autonomy to the central bank in fixing the statutory liquidity ratio (SLR). With inflation rising to 5.58 per cent and industrial production showing much better results at 14.4 per cent growth, fears of an interest rate rise were heightened. Sentiment turned definitely bearish with the RBI announcing the cut off price of the 8.33 per cent GOI 2036 bond auction at Rs. 101, nearly six rupees lower than its previous close.

As a result the positive cues on account of reducing crude oil prices and a rate cut announced by the Bank of England failed to curtail the fall in the market.

Outlook
It remains to be seen when the ordinance passed on amendments to the Banking Regulation Act is implemented. For this will have a severe impact on the market, given that high SLR requirements to be maintained by banks has many times salvaged the bond market from slumping into depression.

The market is likely to remain range bound, with traders betting on a credit tightening policy to be announced in the upcoming quarterly review. The market will remain very sensitive to inflationary cues.