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Debt markets remained relatively stable last week with bonds yields drifting marginally lower and higher money market rates generating some investment demand. Borrowing from the liquidity adjustment facility window at marginal standing facility rate were moderate and the market was adjusting to the new situation after a slew of tightening measures by RBI in the past two weeks. Global markets were largely range-bound and the dollar continued to depreciate against the euro. The euro hit a high of 1.3380 against the dollar during the week, compared to levels of 1.2850 reached in past month when the risk-off environment created by the Fed tapering talk was at its peak.
The rupee, being the major cause of the current turbulence, continued to be volatile hitting a fresh life time low of 61.80 during the week but finally closed marginally stronger for the week at 60.85. Market participants speculated on fresh government measures like an overseas bond issue or hike in import duties to stem the slide in rupee during the week. After the massive correction over the last two weeks, in the absence of any major data flow this week and encouraged by speculation of fresh measures, traders engaged in some bargain hunting resulting in marginal improvement this week. The benchmark 10-year government bond yields eased 16 bps to 8.12%. However, volumes remained concentrated in a couple of securities only with spreads on the other securities widening. Money market rates though largely unchanged, saw good investment demand, particularly from mutual funds at these higher absolute levels.
After the market closing on Friday, RBI announced cash management bill auction of Rs 22,000 crore, to be conducted every Monday. This will potentially suck out any excess liquidity in due course. More importantly, it reinforces the current hawkish tone of the policy stance. This week is the typical data heavy week of the month with important data points like CPI, WPI, IIP and trade balance numbers to be released. CPI inflation is expected to print higher again as the fruits and vegetables prices have firmed up last month. Broad calculations also suggest a marginal widening of trade deficit in July. It seems a difficult proposition for the market to be able to sustain the optimism of the week gone by. Even then, the long end of the market should remain relatively stable as policy action is increasingly putting thrust on the shorter end of the curve.We expect markets to be volatile yet again with weakness at the margin.
Mahendra Jajoo is Executive Director & CIO-Fixed Income at Pramerica Asset Managers
