The bond market remained in a limbo, with sentiment remaining largely bearish. There was a spike in the bond yields on Tuesday (January 23) owing to the government reducing import duties in an effort to curb inflation. The yield on the 7.59 per cent GOI 2016 bond gained 6 basis points from the previous day. After this development yields remained range bound through Wednesday and Thursday. The yield on the 7.59 per cent GOI 2016 bond closed at 7.87 per cent, 7 basis points higher than the previous weeks close. The CRR hike that was announced a month back, failed to curb money supply as a result the government is resorting to other measures to rein in inflation. Traders viewed these developments on a positive note, hoping that these measures will tone down the central bank's tough stance on interest rates in the forthcoming policy review.
The rising oil prices were not received too well by traders. Lower inflation at 5.95 per cent failed to boost sentiment, given that inflation is still above the targeted 5-5.5 per cent band for the current fiscal.
RBI's auction of 14-year bond on Thursday was sold at a yield of 8.2005 percent. Owing to heavy demand after the auction the yield on the 14-year bond fell sharply to around 8.12 percent.
Outlook
With the much awaited policy review out on Wednesday (January 31), the market is likely to be quite volatile till Wednesday with the market being oversensitive to cues on the quarterly policy review. The resulting policy review is likely to set the stage for the impending Rs 9,000 crore auction scheduled between February 2 and February 9, 2007. As of now all market indicators call for a hike in interest rates in the January policy review. However, incase the central bank leaves interest rates unchanged, there will ensue a rally in the bond market.
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