 "Fixed income markets too optimistic: Mahendra Jajoo")
The new found confidence in the debt market was on full display last week. In spite of very hawkish statement from the RBI governor that the room for further rate cuts was "practically non-existent", bond markets witnessed one of the strongest weeks in a long time with the benchmark 10-year government bond yield easing by almost 20 basis points during the week. Corporate bond spreads also narrowed and money market rates eased. Traders perhaps are taking a bet on a series of open market purchases (OMO) by RBI to provide support to bond prices as RBI has indicated its intention to actively manage liquidity by way of OMO. The index of industrial production for March came in at 2.5%, a tad higher than the market expectation of 2.1%. However, after excluding insulated rubber cable, which show growth of approximately 250%, IIP grew just 0.7%.
This week is a data heavy one with monthly inflation and trade balance release. The expectation for inflation is for a sharp decline below 5.5%, mainly driven by base effect and that for trade balance to be around $10bn. Crude oil prices fell sharply in early trades in the US on Friday, after close of markets in India. Thus, incoming data is expected to remain supportive of strong positive momentum. Two factors though need to be watched carefully. Firstly, in spite of improving trade balance and stronger capital flows, the rupee has remained subdued off late and depreciate sharply to close the week at 54.80, a drop of over 1.5%.
Some reports indicated a seasonal widening in trade balance. This was also reflected in higher liquidity adjustment borrowings at over Rs 1 lakh crore this week. Secondly, markets are now pricing in a very optimistic scenario and technical charts are indicating some correction. In this supply heavy month, announcement of inflation indexed bonds is expected to moderate the impact of supply. Given the strong underlying momentum, a correction, if any, may be a good opportunity for a fresh round of buying.
The author is head of fixed income at Pramerica Asset Managers
This week is a data heavy one with monthly inflation and trade balance release. The expectation for inflation is for a sharp decline below 5.5%, mainly driven by base effect and that for trade balance to be around $10bn. Crude oil prices fell sharply in early trades in the US on Friday, after close of markets in India. Thus, incoming data is expected to remain supportive of strong positive momentum. Two factors though need to be watched carefully. Firstly, in spite of improving trade balance and stronger capital flows, the rupee has remained subdued off late and depreciate sharply to close the week at 54.80, a drop of over 1.5%.
Some reports indicated a seasonal widening in trade balance. This was also reflected in higher liquidity adjustment borrowings at over Rs 1 lakh crore this week. Secondly, markets are now pricing in a very optimistic scenario and technical charts are indicating some correction. In this supply heavy month, announcement of inflation indexed bonds is expected to moderate the impact of supply. Given the strong underlying momentum, a correction, if any, may be a good opportunity for a fresh round of buying.
The author is head of fixed income at Pramerica Asset Managers