A truncated week, marked by holiday in New York on Monday and holidays in Mumbai on Tuesday and Friday kept market volumes low and activity flat in yet another period of lull. Last week saw release of monetary policy committee (MPC) minutes of the Reserve Bank of India (RBI) review meeting on February 8 and release of US policy setting Federal Open Market Commitee (FOMC) minutes. Both the events served to endorse market participants' wider belief that the two central banks are converging in their assessment of risk of a rising inflation, as commodities and crude prices stay firm.

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Firstly, a brief glance at global market events - US equities continue to rally and set newer records as the Dow Jones Index registers a 10-day long daily closing-high in a row as investor optimism reaches new zeniths. Investors now believe the Trump administration which is to announce sweeping reforms that aim to cut taxes, reduce regulations and increase infrastructure spending plan.

The S&P 500 index is over 21% up in past 52 weeks. In a related event, official minutes of FOMC released last week suggests, the US Federal Reserve officials signalled lingering potential for a rate hike at its next meeting in March, citing that increased spending and lower tax will fuel inflation. While markets are expecting two hikes this year, the odds of a hike in March remain low, at around 22% as per data from CME.

In other international market developments, Le Penn of France gains in polls and improves his prospects while denting the prospects of France's presence in the Single Currency union. Euro came under pressure. However, Greece's openness to reforms in exchange for aid was a positive development.

The rupee remained stable in a shortened week with robust flows offset by importer demand keeping the local currency in a tight range. Forward premia remained firm reflecting the perception in short- term money market rates which prepare for the last month of the fiscal year. Money market has historically been tight at year-end period. However, with system having an excess liquidity of more than Rs 3.5 lakh crore, there is less concern. Spread between the five-year and one-year OIS remains steady at around 27 basis.

Bond-trading volume has been low and yields have broadly been close to the highs registered post the February 8-RBI policy shock. Minutes released last week suggest four out of six members of the Monetary Policy Committee favoured a change in policy stance to neutral from accommodative, while all six unanimously favoured maintaining a status quo on rates. In the opinion of the committee members, the tailwinds that pushed inflation lower in the last few years via lower commodity and crude prices may not repeat in the next 12-month horizon. Therefore, the upside risks from either a global financial turbulence or sub-normal south-west monsoon could individually materialise and push inflation up.

The minutes appear to suggest the regime of easy rates may be nearing its end and the recent aggressive rate-cuts by banks (in reducing MCLR) may also taper. With equity markets at multi-month highs and susceptible to profit-taking and a weak sentiment in the bond market, March could be a volatile month. The Ides of March may come to haunt.

US fourth-quarter preliminary GDP release and Trump's address to Congress will be keenly watched. US Treasury yields have dropped sharply last week pushing the famed Trump-trade in limbo. Indian bonds will likely trade with a bullish bias as a follow through to softening global yields. 6.80% - 6.90% the preferred range.

IN TAUT RANGE

  • US Treasury yields have dropped sharply last week pushing the famed Trump-trade in limbo  
  • Indians bond trading volume has been low. Yields have broadly been close to the highs registered post the monetary policy shock on February 8, by the Reserve Bank of India  
  • Bonds will likely trade with a bullish bias as a follow through to softening global yields

The writer is executive director, Lakshmi Vilas Bank