Calls Pegged In 7% Range

MONEY MARKET

Rates in the inter-bank call money market are expected to rule fairly easy this week, ranging between 5 and 7.5 per cent. The Rs 1,000 crore 10-year central government paper to be auctioned on Thursday, February 20, is expected to be well subscribed with a cut-off yield of at least 13.7 per cent.

A lot of uncertainty prevails in the market regarding the liquidity position and the yields on government securities. The various auctions being conducted by the Reserve Bank of India (RBI) have seen a lot of inflows and outflows from the system. This has affected trading in securities as banks are uncertain regarding the liquidity position and the yields on papers. They are more actively picking up papers which are being auctioned by the RBI.

The rates were volatile towards the end of the last fortnight touching a high of 11 per cent as banks sought to cover their short positions towards the end of the fortnight. On Saturday, the start of the new fortnight, the rates opened at 8.5 per cent. However, demand was not forthcoming and soon the rate was pared down to below 6 per cent levels.

Trading during the last fortnight was largely determined by the repos auction. The auction sucked Rs 3,335 crore out of the system in the last fortnight but rates continued to rule at around 3 to 5 per cent levels as players were staying away from the market. Security holders wouldn't off load as prices were not attractive to them.

The last fortnight saw prices of securities come down and yields rise. Mostly the interest is expected in the short-ended papers and in treasury bills.

This week also, not much trading is expected as the market will be looking out for the repos auctions. The repo on Saturday is expected to see Rs 1,500 crore flow out of the system. However, one repo auction was reversed last Friday with Rs 3,335 crore coming into the system. The auction of the Rs 1,000 crore 10-year government of India paper is expected to be well subscribed, particularly by nationalised banks and insurance companies. Dealers largely expect the yield to be at least 13.7 per cent which makes it an attractive investment.

However, this auction is not likely to have a great impact. The sum of Rs 1,000 crore is not large given the present easy liquidity conditions. Moreover, the money will flow out of the system only the following week.

The redemption of the India Development Bonds last week has not had much of an impact on the system.

The redemption has not adversely affected the liquidity position of the banking system which continues to remain good.