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Bond Prices Perk Up

Markets corrected some of the losses accumulated over the past three weeks on expectations of stringent monetary policy review. Bond prices perked up on the back of a less severe review

The fact that the past two weeks were governed by worst case scenario estimates of the quarterly policy review, the market did not go into a tizzy on Wednesday, 31 January, 2007. The consequences of the policy review will be less grave than what was already factored in by market players. The optimism was a function of what RBI did not do, as the reverse repo and the SLR were left unchanged while the repo rate (the rate at which RBI lends) was increased by 25 basis points. As a result, the yield on the 10 year benchmark 8.07 per cent GOI 2017 bond fell to 7.74 per cent on January 31, 2007, a whole 16 basis points lower that its previous close. Further gains were made over the next two trading sessions and the yield fell by another 4 basis points to close at 7.7 per cent on February 2, 2007.

Global cues also added to the optimism, with the US Federal Reserve leaving interest rates unchanged. Also statements from the Fed indicated that price pressures are also expected to be moderate. The market did not panic on Friday, February 2, with the inflation rearing its head once again at 6.11 per cent, higher than the 5.95 per cent of the previous week.

Outlook
While the monetary policy review was not as harsh as expected, the RBI has made its stand very clear - controlling inflation will be its paramount concern. And if the recent repo hike fails to curb credit growth and money supply (as the CRR hike failed to pack a punch) then the central bank may turn unsympathetic.

The bond market is likely to take cues for the near term from movements in inflation figures. The markets are likely to remain range bound over the coming week and will be sensitive to global cues. The inflation data next week will be closely watched, as it could force RBI to step up its fight against inflation which could depress the market. Liquidity pressures might also cast a shadow on the impending RBI auction of Rs 9,000 crore over the coming week.