The market opened on an upbeat note on Monday, with a lower than expected mop up through the market stabilisation scheme (MSS). The yield on the 10-year benchmark, 8.07 per cent GOI 2017 bond dropped eight basis points from its previous close. However, these gains were not sustained with the yield on the benchmark finally settling at 8.03 per cent on Friday, March 16 up two basis points from March 9.
The undertone in the market was clearly spelt out by the possible liquidity crunch owing to the advance tax outflows, MSS and the bond auctions. Volumes remained thin owing to the possible liquidity crunch which finally kicked in on Friday, March 16. The call rates doubled within a day's time, from a buoyant 5.40 - 5.50 per cent on Thursday, March 15 to 9.50 - 10 per cent on Friday. This spike in call rates triggered a sell off, pushing up yields. Higher inflation at 6.46 per cent, up from the previous 6.1 per cent made the market even more edgy.
Outlook
Even though inflation refuses to show signs of easing up, there are positive indications that the CRR hikes have finally begun having their intended effect. The money multiplier, which had peaked to 4.93 on November 10, 2006, has since fallen to 4.69 as of February 16, 2007. The effect of the MSS will in due course balance liquidity in the system. The central bank is also focusing on managing excess cash in the system. While one cannot predict the central bank's next move, there are positive cues for the market.
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