Cash Curbs Call, Forces Yields Down; Rupee Rises, Premiums Slip

Call money continued to rule easy in the 5.65-5.75 per cent band as the banking system remained deluged by funds. Trading in government securities was lacklustre in the absence any positive triggers.

That the banks are rolling in funds can be gauged by the fact that at the daily repo auction, the Reserve Bank of India (RBI) received, on an average, bids amounting to about Rs 13,900 crore. During the past week, the central bank received total bids aggregating Rs 55,545 crore (as against Rs 56,240 crore in the August 5-9 period) and accepted bids for Rs 44,118 crore (Rs 42,025 crore).

Last week was the first half of the reporting fortnight and demand for funds was mainly from primary dealers and foreign banks.

Government bond yields ended lower on Monday as some funds-flush investors bought across maturities, although yields came off the lows on a late bout of profit taking. The benchmark 10-year bond yield ended at 7.1950 per cent. On Tuesday, gilt yields barely moved as traders discounted a rate cut by the US Federal Reserve.

Yields ended a bit higher on Wednesday, with the yield curve steepening slightly after the US Fed belied traders' hopes by leaving its trend-setting funds rate unchanged. The benchmark 10-year gilt yield firmed to 7.2165 per cent.

On Thursday the market was closed on account of Independence Day. On Friday, short-tenor gilts edged up by five paise while the medium and long-end papers moved up by 15-30 paise on account of aggressive selling and buying by an insurance company. On Saturday, the yield of the 10 year paper edged lower to 7.18 per cent.

Ample funds and hopes of softer interest rates have generally lifted bond prices in the past three months, bringing yields to near lifetime lows.

The rupee closed at a high of 48.61/62 to a dollar on Monday and ended the week stronger at 48.5700/5750 on Friday on the back of all round supply of greenbacks and little importer demand.

Even as supply exceeded demand, the RBI intervention via the state-owned banks was on a lower scale resulting in appreciation of the rupee.

Forward premiums edged lower during the week on the back of exporters selling their forward dollars. On Monday, the six months annualised forward premiums closed at 4.63 per cent and on Friday it ended 21 basis points lower at 4.42 per cent.

Meanwhile, India's foreign exchange reserves fell by $ 118 million in the week ended August 9 over the previous week. The reserves as on August 9 stood at $ 60.030 billion. According to RBI's weekly supplement, the fall in reserves is solely on account of the foreign currency assets declining by $ 118 million in the reporting week to $ 56.769 billion. Gold reserves remained static at $ 3.248 billion while special drawing rights stood at $ 13 million.

In the week ended August 9, loans and advances extended by the RBI to the central government declined by Rs 3,024 crore to Rs 10,257 crore while that to the state governments grew by Rs 801 crore to Rs 4,461 crore.