The Hindu Business Line : Inflation is worrying

Kotak Mahindra Mutual: The 10-year benchmark had touched a high of 5.98 per cent during the week and has retraced back to around 5.83 per cent by the end of the week.

Outlook: The market is likely to trade in a band with bouts of volatility during the next week. Inflation will continue to be of concern to the markets in the short term.

Average trading volumes during the week was Rs 2,126 crore, which was lower than the average of more than Rs 3,000 crore during the previous month.

The headline WPI inflation was higher at 6.16 per cent for the week-ended July 2003 compared to 6.09 per cent during the previous week.

The inflation number, however, was lower than the expectation of 6.40 per cent due to lower primary articles prices. In reality, the WPI index declined over the previous week and, hence, the rise in inflation is purely on account of the base effect.

Monsoon madness might mar the markets: Slow progress of rains has increased the concern over the agricultural output and its implication on primary article prices and the overall inflation trend .

Continued higher crude prices and possibility of further hike in domestic fuel prices over the additional taxes imposed in the Budget were weighing on the market as well.

Liquidity surplus continues to be healthy: Repo outstanding at more than Rs 53,630 crore by the end of the week compared with Rs 64,555 crore at the end of the previous week.

Forex inflows have not shown negative trends in the last two weeks, which is a positive sign for the liquidity.

US 10 year G-sec yield lower on muted inflation growth data: In the US markets, the benchmark 10-year yield declined to 4.35 per cent, the lowest since the middle of April after a lower-than-expected increase in core consumer prices in June. This reinforced the view that US Fed would continue to be measured in future rate hikes.

Franklin Templeton

Debt markets weakened further during the week on the deferral of the EPF rate decision.

However, sentiment improved on expectations of a favourable decision by the government on transaction tax and tame inflation data in the US and Europe.

Outlook: The clarification on the transaction tax and data on inflation is likely to set the tone for the markets.

With oil prices again moving higher, there could be concerns about inflationary pressures in the coming weeks.

Liquidity remained easy during the week despite the MSS auction and the bids at the repo auctions averaged at around Rs 54,000 crore.

The RBI conducted an auction of Rs 5,000 crore under the

Market Stabilisation Scheme (MSS) and the cut-off yields were lower than expected.

Ample liquidity ensured that the call rates did not rise despite outflows towards payment for the auction held on Wednesday. Call rates closed at 4.35/4.50 per cent.

The yield on the 5-year AAA rated corporate debenture benchmark rose to 6.56 per cent, a rise of 21 bps and the corporate spread over gilts contracted to 97 bps.

The rupee weakened sharply during the week on concerns about the impact of the ongoing political wrangling over FDI proposals, on FII flows.

(Edited extracts from the latest weekly market report of Kotak Mahindra Mutual Fund and Franklin Templeton.)

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