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Losses Galore

The yield on the benchmark 8.07 per cent GOI 2017 bond increased by 16 basis points over three trading days. The fall in bond prices was contained by an improvement in the liquidity position

The central government's fight against inflation has taken its toll on the stock and bond markets alike. On March 30, the central bank announced a 25 basis point increase in the repo rate in addition to a 50 basis point increase in the CRR, which will be implemented in two phases on April 14 and 28.

The reaction, as expected, was quite severe. The yield on the 10-year benchmark 8.07 per cent GOI 2017 bond closed at 8.18 per cent on Tuesday, April 3, a 14 basis point increase from its previous close.

While the move in itself was not surprising given that inflation has remained sticky, it was the timing that caught traders off guard. Inflation for the week ending March 24 stood at 6.39 per cent, lower than the previous week's 6.46 per cent. Call rates also eased off significantly and settled at 7-7.25 per cent levels. This would be tested over the coming week, however, as the increase in government spending is likely to offer some recourse.

The surge in crude prices to $68 per barrel levels is a little worrisome. Given that globally most economies are facing the pressure of increasing commodity prices, such a spike in oil prices could further frustrate policy measures taken by central banks across the globe to contain inflation. Such a trend, combined with the RBI's clear intolerance for high inflation, does not bode well for the bond markets.

The liquidity in the market is likely to be tested with a Rs-10,000 crore auction slated for April 12, in addition to the implementation of the CRR hike on April 14. While participation in the market will be affected, the liquidity crunch is not likely to be too severe with an expected increase in government spending. The bond market is likely to remain range bond over the forthcoming week. Moreover, in the absence of any positive cues, a recovery in the market in the near term looks unlikely.