The interest rates in the inter bank overnight money market are expected to rule in the region of seven per cent and above during the course of this week. On Saturday, the beginning of a new fortnight, the call rates ruled in the band of 7.50 per cent to 8 per cent.
The rates are expected to firm up initially on account of the outflow of Rs 5000 at the auction of 5-year central government paper.
This payout is coinciding with the redemption of the 13.50 per cent 1997 on September 1. While the outstanding amount is Rs 7,000 crore, around Rs 2,000 crore is held by the Reserve Bank. So the outflow of Rs 5,000 crore will be matched by a corresponding inflow. While overnight rates are expected to open at a higher level, they are expected to taper-off during the course of the week.
The response at the auction of 364-day treasury bills on Wednesday was poor with the central bank mopping up only Rs 400 crore including the devolvement of Rs 100 crore on the primary dealers. At the auction of 91-day treasury bills the issue would have devolved had it not been for the support of one non-competitor bid.
If the uncertainty on the interest rate front persists then there would be a decline in the bids at the treasury bills auction.
In the last one month the central bank has been mopping up over Rs 1000 crore at the fortnightly auction of 364-day treasury bills.
The quantum of competitive bids at auction of 91-day treasury bills had also improved over the last few weeks. But the poor response at last weeks auction bears testimony to the uncertainty prevailing on the interest rate front.
While banks have preferred to stay out of the repos auction, the auction of 14-day treasury bills continue to draw a good response. At the auction on Friday, RBI mopped over Rs 4000 crore.
This has ensured that the call rates have been stable and not plummeted to 1 - 2 per cent.
Given that there was a bank strike on Thursday and Friday market activity during last week was lacklustre.
But the important thing was that the securities market recovered from the effects of the forex market.
As a consequence of the depreciation in the rupee the prices had initially fallen. But during the course of the week the prices recovered.
During the course of this week, in the securities segment, the activity will be concentrated on the new paper i.e. the 11.15 per cent 2002. At the auction the central bank offered the primary dealers the option of underwriting Rs 1800 crore at a commission of Re one.
Among other securities the 12.59 per cent 2004 which has been the livewire of the securities market, the 10.85 per cent 2001 and the 11.19 per cent 2005 will be active. In line with the cut off at the auction of the five year paper on Saturday there could be a realignment in the security prices.