Prices of government securities shot up by 25-30 paise in the long and medium term papers today, while short-tenure paper prices moved up by 10-15 paise. This is despite the 25 basis point (bps) in the US Fed rate to a four year high of 3.5 per cent. One basis point is one hundreth of percentage point. | |
| In line with the US bond market, Indian government paper market too discounted the Fed rate hike. In the US market, the treasury yields softened. |
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| While 25 basis point hike was already factored in the Indian bond market, the positive triggers included major buying of gilts by life insurance major Life insurance Corporation (Rs 100 crore), slight moderation of oil prices from highs of $64 a barrel and an abundant liquidity in the system. |
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| Even as Reserve Bank of India governor Y V Reddy in his address to the Institute of Insurance and Risk Management in Hyderabad stated cautious action towards rising oil prices as it impacts inflation and exchange rate, the market took comfort from the fact that the RBI governor is open to conducting liquidity management operations more than once a day. |
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| "This indicates the extent of liquidity in the system," said a bank dealer. Liquidity management operations include reverse repo for absorbing liquidity and repo for injecting liquidity. |
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| Liquidity in the market of Rs 40,000 crore as reflected in the reverse repo bids. Reverse repo is liquidity management operation by the RBI whereby it sucks out the excess liquidity from the system. |
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| The foreign exchange market witnessed severe cash dollar shortage with one-month forward dollars trading at a discount, contrary to a premium. |
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| According to dealers, the cash dollar shortage has come up with heavy RBI intervention last week to protect the spot rupee from rapid appreciation. The spot rupee could have appreciated to 43.25-30 to a dollar but for the dollar buying by public sector banks at the behest of RBI. The rupee is overvalued by about 10 per cent in terms of its real effective exchange rate, dealers said. |
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| Exporters are selling forward dollars to banks. However, banks are finding it difficult to buy dollars from the market to sell it to customers. This is basically a buy-sell swap by the bank to arrange dollars to meet customer demand. |
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