It turned out to be yet another high octane week for the fixed income products. The ongoing rally in bond prices was further fuelled by WPI inflation coming in at 4.89%, way below market expectation of 5.40%. As has been repeatedly mentioned in my earlier columns, CPI inflation also eased below double digit levels to 9.39% with a distinct trend of further weakness in coming months. The RBI governor was reported to have said that he will surely consider this much more than expected drop in inflation while deciding the next policy move. Bond markets which were already in overdrive mood needed no further egging with bond yields crashing to the lowest levels in last three years.
In this euphoric mood, the significantly higher than anticipated trade deficit at $17.7bn did not have much impact. Exports slowed down and gold imports turned out to be almost 132% higher than in the corresponding period last year. The market easily assigned this to the accelerated demand due to sharp fall in gold prices last month just ahead of the traditional festival of Akshay Tritiya. The markets concluded that it was a one-off and that gold imports will slow down going forward as the gold prices continue to slide and investment demand will taper off.
Such was the confidence of market in further rate cuts that the cut-off for new benchmark 10 year gilt came in at 7.16%, 9 bps below the current repo rate. Hectic activity was also seen in other spread products like state development loans and corporate bonds. Huge buying was seen in new issuances of corporate bonds by FIIs. AAA-rated PSU corporate bonds traded below 8% mark for the first time in more than five years. There are visible signs of overheating in the market now even as the momentum remains extremely positive. Most traders are carrying large long positions even as public sector banks remain net sellers in the secondary market. With early signs of credit pick-up, a small correction seems on its way this week. Bonds did correct marginally from their peak in late trades on Friday on news that rating agency S&P retained its negative outlook on India. At this point, with underlying fundamentals continuing to promise further improvement, any correction should be used to create fresh positions. Fixed income markets remain constructive.
Mahendra Jajoo is executive director and CIO - fixed income at Pramerica Asset Managers
