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Our Bureau

Mumbai , July 21

EVEN as news of debt deals being exempted from the transactions tax were welcomed by dealers in the debt market on Wednesday, underlying apprehensions of rising inflation and global interest rates capped the rally in bond prices.

Bond prices, which moved up on the news of bonds being exempted from the transaction tax net, rallied by 40-50 paise but settled lower towards close of trading.

However, the market witnessed a marked improvement in transaction volumes which were higher at Rs 2,500 crore to Rs 3,000 crore, dealers said. Over the past few days, volumes in the bond market had dwindled down to Rs 500 crore due to weak sentiment.

"The bond market has reacted positively to the exemption from transaction tax, but the next day will show how far the rally can be sustained as there are several other issues weighing on market participants. The inflation number is expected to be higher at 6.40/50 per cent on Friday, which will have a strong bearing on the market," said Mr K.P. Suresh Prabhu, Chief Dealer and Vice-President, HDFC Bank.

The most widely traded security was the 11-year benchmark, 7.38 per cent 2015 paper which opened at Rs 110.60, shot up to Rs 111.60 during the day before settling to close at Rs 111.25. The yield on 10-year benchmark 7.37 per cent 2014 paper closed lower at 5.83 per cent against its previous levels of 5.91 per cent.

"The market is apprehensive on account of the FOMC meeting in August. Recent statements by Mr Alan Greenspan are indicative of a hike earlier than expected. This coupled with expectations of increased State Government borrowings and drought control expenditures is raising concerns on revenue generation of the Government," said a senior dealer with a private sector bank.

Call rates were steady at 4.25 per cent to 4.50 per cent. Under the LAF window, the RBI received and accepted 30 bids worth Rs 5,950 crore.

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