Easy Liquidity To Keep Call In Narrow Alley; Small Savings Key To Gilts Movement
Call rates are expected be in the 6.50-7.00 per cent during this week as the liquidity condition will remain good. Money market dealers said that though there will be demand pressure in the first week of the reporting fortnight, there is enough liquidity available in the banking system especially with the public sector banks to keep call rates under seven per cent.
The treasury head of a new private sector bank said, "With credit offtake keeping low, there will not be any problem with the liquidity. Moreover, as the ways and means figure indicates that there will be no auction during the week, any pressure on overnight rates is unlikely."
Call rates ruled in the 6.50-9.00 per cent on Friday. The reason for high call rates was the rush for liquidity to cover the cash reserve requirement at the last moment by a host of private and foreign bank.
There will be Rs 1,457.9 crore worth of inflows in the market on account of coupon payments on central and state government securities. This will add extra comfort to the liquidity situation in the market, dealers said.
Call rates can even go below the 6.50 per cent level if the expectation of repo rate cut is realised. Money market dealers are expecting small savings rate to be cut in the Budget and the Reserve Bank of India to follow suit by reducing repo rate.
A dealer with a foreign bank said, "Call rates are artificially kept higher than what it should be by keeping the one-day repo rate fixed at 6.50 per cent. Even the one-year, two-year and three-year government paper yields are below that level. Once the repo rate cut is effected, overnight rates should also go down."
Dealers pointed out that repo rate is being kept unchanged at 6.50 per cent level since May, even if the bank rate and the cash reserve ratio was cut after that.
Meanwhile, government securities market during the week will largely track the Union budget announcements. According to dealers, in the first half of the week, participants will be cautious and volumes will be low.
However, post budget, that is, after February 28, there will be volatility in the market and prices will move in tandem with the decision on small savings rate.
A dealer with a private bank said: "There is likely to be some decision on the small savings rate in line with the Y V Reddy Committee recommendation. This will prompt the Reserve Bank of India (RBI) to cut the repo rate in the short term and bank rate in the long term. Hence, prices are likely to go up after the budget."
A section of the market participants, however, feels that the finance minister may not cut the rate because of political pressure and in that case prices will crash.
A primary dealer said : "We are afraid that no decision will be taken on the small savings rate. In that case the rally seen in government securities over the past couple of months, except the last week, will not only stop, but also fizzle out rapidly. This is because the rally was on expectation of a cut in the administered rate."