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Bond Markets Await Policy Review

Bonds continued to ascend during the week ended April 20, 2007, though at a modest pace. The yield on the benchmark GOI 2017 8.07 per cent bond declined three basis points to end at 8.07 per cent

After the upward march during the previous week, bonds continued to ascend during the week ended April 20, 2007, though at a much more modest pace. The yield on the benchmark GOI 2017 8.07 per cent bond declined three basis points over the week to end at 8.07 per cent. Liquidity conditions remained tight at the start of the week, as the first phase of the CRR hike came into effect from last Saturday, sucking approximately Rs 7,700 crore of funds out of the system. However, the bond markets remained largely unchanged as the SLR demand kept the bond prices buoyant.

Wednesday (April 18) witnessed the bond markets make significant gains in the wake of improved cash position. Moreover, a sharp appreciation in the value of rupee (which touched a nine-year high against the US dollar during the week) has also raised hopes that the central bank would intervene soon to stem the rupee gains by buying dollars. This would inject liquidity in the system.

The markets remained rather range-bound on the last two trading days of the week, as the traders turned cautious ahead of the Rs 6,000 crore bond auction scheduled for April 27. Investors are also gearing up for the monetary policy review to be held on April 24. In fact, a higher than expected inflation (6.09 per cent) for the 12-month period ending April 7, 2007 has also raised fears of another rate hike in the forthcoming policy review.

Call rates remained volatile during the week. Initially, they rose sharply to touch 15-16 per cent, but eased off towards the latter part of the week to end at 9.5-10 per cent.

Outlook
We might witness a dull start to the next week as the traders are likely to tread cautiously ahead of the policy review and the scheduled bond auction. The RBI's stance on inflation and interest rates, as will become clear in the policy review, will probably set the course for the bond markets.
The implementation of the second phase of CRR hike on Saturday (April 28), which will further put pressure upon the liquidity, will also weight upon the market sentiments.