The week that went by was tumultuous on account of the US Presidential elections and the demonetisation of high value currency by the central government.

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The 10-year US Treasuries recovered from 1.7145% to 1.95% as market thought that Trump will boost government spending to deliver on his promise of large scale infrastructure spending and tax cuts. The interest rate differentials between the two-year German bunds and the US Treasuries remained at 147 basis points (bps) and the probability of the rate hike by Fed in December increased from less than 50% to over 86%. The Mexican peso went into a free fall against US dollar. Trump’s win had a negative effect on all the emerging markets, both equity and currency. Indian markets also followed the trend and the equity markets dropped considerably, and the rupee went back to over Rs 67.25 but finally closed at Rs 66.96. During the week, 19 state governments raised through issuance of SDLs for four-year, five-year, six-year, and 10-year, raising Rs 26,390 crore.

The cut-offs were lower by around 3-4 basis points at the lower end of the tenor. In the central government securities auction, we saw the longer tenor being cut off at 3 bps higher than market expectations amid volatility seen on the benchmark 10-year G-Sec which declined during the week. Moreover, the government’s move to demonetise high value currency notes took markets by surprise with the equity, currency and bond markets turning volatile. Goverment’s latest move will reduce fiscal deficit by Rs 5 lakh crore and is likely to benefit in terms of inflation.

Thus, another volatile week lies ahead.

The writer is executive director,  Lakshmi Vilas Bank