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The inter bank call rate dipped to 0.10 per cent on the back of surplus liquidity in the system While the bond yields did pose a modest recovery market sentiment remained cautious

The absence of an MSS bond auction on Friday, May 25 was received well by traders and the yield on the benchmark 8.07 per cent GOI 2017 bond fell by nine basis points on Monday, May 28.

The entire week saw a comfortable liquidity situation in the market; however, this did not translate into windfall gains for the bond market. This cap on gains arose because market sentiment was largely governed by fear of a backlash from the central bank in containing this excess liquidity.

The main trigger for the buoyancy in liquidity arose primarily due to the maturity of a bond which injected Rs 20000 crore. A suspected intervention by the RBI in the currency market further facilitated an improvement in liquidity. The call rate finally settled at 0.50-0.70 per cent on Friday, June 1. The bond market managed to hold on to the gains made during the week and the yield on the 10 year benchmark 8.07 per cent GOI 2017 bond closed at 8.08 per cent. Inflation also provided further optimistic cues and was reported at 5.06 per cent, much lower than 5.44 per cent reported the previous week.

On June 1, the central bank announced its decision to stick to its schedule and auction Rs 9000 crore. In addition to this an MSS bond auction of Rs 5000 crore was also announced.
Outlook

While the central bank has announced two auctions that will effectively drain out Rs 14000 crore there is likely to be ample liquidity in the system. While inflation figures have reduced considerably, the RBI has not lost its aggression in containing inflation. Fears of a further monetary tightening will continue to rule sentiment and traders will be cautious. Furthermore, RBI's unpredictable stance in the currency market would determine the liquidity situation as well. Nevertheless, one can hope for a further decline in bond yields.