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Budget Woes

The reactions to the budget in the debt market were not very optimistic. The yield on the 10 year benchmark 8.07 per cent GOI 2017 bond rose by four basis points over the week ending March 2, 2007

Inflation veered its ugly head yet again, with market sentiment very sensitive to inflationary cues. At the same time, other macro indicators such as the below target fiscal deficit were received well.

In fact by the beginning of the week on February 26, the yield on the 10-year benchmark bond fell by four basis points from its previous close to end at 7.89 per cent, with traders expecting the government to meet its fiscal target thereby reducing the quantum of borrowing for the forthcoming fiscal.

However, the reductions in duties on a range of items raised speculations of higher dependence on market borrowings to meet expenses in the next fiscal year. Consequently, the yield on the 10 year benchmark bond rose by nine basis points on Wednesday, February 28. Matters were not helped when the Deputy Governor of RBI, Rakesh Mohan stated that the RBI would take all possible measures to rein in inflation. The comment led to a knee jerk reaction with market players expecting another round of monetary tightening.

On Thursday, March 1, the market regained some of the losses made the day before with the yield on the benchmark bond falling by six basis points.

However, lower inflation at 6.03 per cent released on Friday, March 2, failed to bring back cheer to the market. The yield on 8.07 per cent GOI 2017 bond rose four basis points to end at 7.97 per cent.

There was enough liquidity in the market, just before the implementation of the CRR hike, on March 3, with call rates at comfortable levels of 6- 6.10 per cent. Such buoyancy in the market became a cause for concern amongst traders who feared a backlash from the central bank.

Attention is now focused on the impending auction between March 2 and March 9, 2007. The markets continue to remain jittery on the possibility of another round of monetary tightening measures. The fact that the RBI is pumping in money to support the rupee has caused huge inflows into the system. If the stock market continues to plummet, leading to foreign exchange outflows, liquidity will tighten. This would in turn affect demand at the impending auction. Yields are likely to remain range bound.