Bond markets to remain range-bound this week: Mahendra Jajoo

The fixed income markets had a relatively lacklustre week, as the markets swung to a wait and watch mode for the monetary policy review due this week, trading sideways in a narrow range. Bond yields inched up marginally in the absence of any major news flow and as traders await further guidance from RBI as to where it balances the growth in an environment of high inflation. Weakness in the US dollar continued to persist as non-farm payrolls grew at modest pace of 148,000 in September against an expectations of 180,000. It made a new yearly low of 1.38 against the euro.

 
Tracking global cues, the rupee strengthened to an intra-week high of 61.08 but could not sustain gains and fluctuated in a wide range of 61.31 to 61.71 for most of the week as month end dollar demand and defence related payments weighed on the currency amidst rumours that RBI was buying dollars to strengthen the defence against anticipated tapering by Fed in coming months. In sideways movements, the benchmark 10-year government bond touched an intra-week low of 8.55% after the weak US jobs report but quickly pared gains on expectations of a repo rate hike in upcoming policy and it hit back the weekly high of 8.63% .The downside was limited as Dr Raghuram Rajan’s comments that central bank would respond to growth estimate cuts in policy meeting supported the sentiment. The finance minister also reassured markets on his commitment to keep fiscal deficit at 4.8% of GDP. The Government is likely to shift $15 bn subsidy costs to FY 2014-15 budget. The benchmark government 10-year bond eventually ended the week 3 basis points higher at 8.58%. Corporate bonds also ticked up 2 bps during the week.

 
 Liquidity in the system improved as marginal standing facility borrowings dropped to Rs 25,400 crore from Rs 38,000 crore in previous week. Money market rates eased somewhat in anticipation of further easing in MSF rate.  One year bank certificates of deposit rates eased 9 bps to 9.06% from 9.15%.The 3 month bank CD rates remained well anchored between 8.98% to 9.00%.
 

The focus this week will be centred on the monetary policy review this week. The market widely expects a repo rate hike of 25 bps and a cut in MSF rate by 25 bps. That scenario having been largely priced in, guidance for future stance from RBI will guide the market action. A hawkish guidance may potentially take the 10 year yields closer to 9% mark whereas a slight tilt towards growth given the renewed risk-on global environment and relative stability in currency may propel a relief rally. At this point, given the offsetting positive factors of Fed being more benign than in earlier months and poor growth and negative factors of sustained high inflation, markets are continue to be range bound. Any rally would be a good opportunity to book profits whereas any correction would provide a fresh opportunity to accumulate.

Mahendra Jajoo is executive director & CIO-fixed income at Pramerica Asset Managers