Amidst the buoyant equity markets, debt market seldom gets a chance to display its shine. The article analyzes the impact of Budget 2006-07 on the debt market.

The debt market responded positively to the Union Budget 2006-07, as appropriate assiduousness was applied to civilizing liquidity conditions and debt market restructuring. Significant positives appeared from dominant factors like a lower-than-budgeted fiscal deficit for the present year, lessening qualms of government investment crowding out private investment in an already firm interest rate milieu. Precise actions to restructure and broaden the extent of the debt market result in sustained trading volumes. The increased limit on Foreign Institutional Investor (FII) investments in government securities and corporate debt is likely to increase liquidity in the market.

The fiscal 2005-06 began with a dynamic debt market that was supported by healthy liquidity and sizeable debt instrument demand. Even though interest rates increased in agreement with global rates, bond market activity remained strong till September 2005. On the other hand, cash outflows on account of advance tax flows and redemption payments outstanding on the India Millennium Deposit Scheme tightened liquidity in the market. The market has, ever since October, been incapable to recuperate from this liquidity overhang and has witnessed low trading volumes, driving the interest rates to four-year highs.

The year 2005-06 started with an inflation rate of 5.7% in April 2005, which softened at around 3.3% in August 2005 and increased subsequently to approximately 4.6%. Inflation had a comparatively gentle impact on debt prices during the fiscal 2005-06 since liquidity shortages subjugated the debt market situation. The average Liquidity Adjustment Facility (LAF) net outstanding repo balance for the initial half of the fiscal 2004-05 stood at Rs. 2,375 mn; it cut down to a negative Rs. 1.077 mn for the period October 2005_February 2006. The domestic cash shortages in the debt market compensated the impact of growing US interest rates. The US interest rates considerably influenced domestic interest rates till October 2005, but the second half of 2005 witnessed the markets merging themselves to higher global interest rates and yields becoming more responsive to domestic conditions.

Portfolio Organizer Magazine, Union Budget, Debt Market, Equity Markets, Foreign Institutional Investors, FIIs, Government Securities, FII Investments, Liquidity Adjustment Facility, LAF, Central Government Securities, Investor Protection Fund, Corporate Bonds.