Government bonds edged up in February amid continuing, largely thanks to the Reserve Bank of India's decision to continue with open market operations (OMOs) to ease liquidity pressures in the economy and amid expectations of a cut in interest rates.
It wasn't a home run for bonds either as yields at the shorter end of the curve rose as systemic pressure on liquidity continued to linger following the central bank's enormous effort in the past couple of years to tighten monetary policy to contain inflation.
During the month, the direction of government bonds was largely dictated by the presence (or lack) of the central bank's OMOs--out of total bond purchases of Rs 1,025.16 billion since starting in mid-November, the RBI purchased bonds worth Rs 305.16 billion in February.
This despite that the central bank had in January cut cash reserve ratio by 50 basis points to boost liquidity (the CRR cut infused Rs 320 billion into the banking system).
Weak economic data--with industrial output falling to 1.8% in January--and a fall in weekly as well as headline inflation numbers (the wholesale price index inched to 6.55% in January, compared to 7.47% in the month before) led to hopes of monetary-policy easing and enhanced appeal for government bonds thus pushing up prices.
But bond investors also grappled with concerns that the recent price in international fuel prices--Brent crude climbed 9.3% during the month--may stoke inflation again after its recent downward trajectory, delaying the central bank's decision to ease policy.
Even after recently expressing it would concentrate on boosting flagging growth as opposed to fighting inflation, the central bank is likely to carefully weigh cutting interest rates soon in the wake of oil prices remaining high.
Further, there were also expectations the central bank may not embark on easing until the government reveals its fiscal-consolidation plans in upcoming budget on March 16.
The next few weeks will be crucial for the fixed-income markets, given the release of economic numbers such as IIP and WPI, RBI's monetary policy review and Union Budget. These events will provide cues into the direction government bonds will take going forward.