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Relief at Bond Market

With call rates spiking to highs of 70 per cent mid week, the bears reined at the bond market. But a timely intervention by RBI managed to alleviate the crunch and returned cheer to sentiment

The advance tax payments due over the week led to a severe cash crunch in the banking system. The bond markets opened on a shaky note on Tuesday, March 20, with banks selling bonds to meet the requirements of their corporate clients. The situation was further exasperated with reports of a three day strike by state run banks. The yield on the 10-year benchmark 8.07 per cent GOI 2017 bond rose to 8.07 per cent on March 20, in line with the whopping spike in call rates which touched a high of 70 per cent on the same day. Consequently, trading volumes remained extremely thin.

But there was a significant recovery of 10 basis points on March 22 (over the previous day); with the RBI playing messiah for banks and alleviating the liquidity crunch by allowing banks to use cash from the LAF repo bids for inter-bank lending. The cancellation of the strike also brought cheer back to the markets. The markets finally posed a recovery over the week and the 10 year benchmark rate closed at 7.95 per cent on Friday, March 23, eight basis points lower than the week before. The call rates also panned out to close at 11 - 12 per cent by Friday.

There wasn't any significant reaction to the inflation data released which remained unchanged from its previous close of 6.46 per cent as of March 10.

The RBI's borrowing calendar for the first half of the forthcoming fiscal will give some direction to the liquidity condition for the next month. The central bank will continue with its bond auction under the market stabilisation scheme with an auction worth Rs 6,000 crore of a two year bond slated for March 28.

Inflation is likely to resume focus for traders over the coming week. Preliminary indications suggest a deceleration in the credit growth by banks. This is likely to be received well by traders. The full affect of the CRR hikes will start kicking in soon, easing worries of a further rate hike.