Bond traders will be eagerly waiting for the outcome of the meeting of the empowered group of ministers on freeing oil prices on Monday, since an increase in petroleum could push yields up.
Another factor that could influence bond movement is the fallout of the crisis in Europe. On Friday, bond yields rallied to close the day at 7.50 on news of a possible default by Hungary, after touching a four-week high in the morning prior to the government bond auction.
The auction of Rs 13,000 crore worth of government bonds passed off smoothly though the yields quoted by the Reserve bank of India were lower than those expected by dealers.
“Most traders were short on paper prior to the auction and decided to stock up. This helped the auction pass off smoothly,” said a bond trader at a foreign bank.
Dealers expect the 10-year government to trade in the range of 7.4-7.5 per cent next week. An increase in oil prices will fuel inflationary expectations and push up bond yields.
However, bad news emerging from Europe would push bond prices up as investors move from equity to the relative safety of government bonds.
Bond dealers are also hopeful that the government will call off the auction scheduled next week, since liquidity continues to remain tight.
Call money rates
With the liquidity deficit likely to persist over the next one-two weeks at least, banks overnight call money rates are likely to move in the range of 5.2-5.3 per cent next week.
“Any news of increased government spending will be welcomed by the market,” said a money market dealer with a private sector bank.
Banks were net borrowers to the tune of Rs 16,875 crore on June 4, which was a reporting Friday. Last week, banks parked Rs 6,200 crore at the reverse repo window, while in the week before that, the surplus was as high as Rs 47,000 crore.
Rupee to weaken
News that Hungary might possibly default on its debt is likely to trigger a fresh round of dollar-buying. The equity markets are also expected to open on a weak note on Monday, which will put further downward pressure on the rupee. With more bad news likely to emerge from Europe, foreign currency traders expect the dollar to reach the Rs 47.40 levels soon.
