Gilts Sharply Down On Auction Notice, Calls Rangebound

Government security prices fell sharply by Rs 1-1.25 across the maturities on the back of the announcement of a Rs 8,000 crore open market auction. Call money rates continued to remain in the range of 6.50 per cent to 6.60 per cent on easy liquidity.

Government security prices dipped for the second consecutive day. The trading volume was low as most of the market participants were staying aside. A dealer with a private sector bank said: "As the prices are already high, market participants were confused whether it could go up even more. After the auction announcement, it was clear that even the Reserve Bank of India (RBI) was not comfortable with such high prices." Most of the dip in prices, as a matter of fact, happened after the announcement.

Call money rates continued to remain stable and hover just over the refinance rate of 6.50 per cent. According to the dealers, there were huge supply of liquidity from the public sector banks, but no takers for that. A primary dealer said: "Because of continuous deposit growth, there is no problem with the liquidity. Hence, even being the first week of the reporting fortnight, the demand for overnight money is not too high."

The comfortable liquidity condition in the money market was once again reflected in the huge subscription in the daily repo auction. The RBI today received two bids of Rs 9,575 crore for the one-day repo auction and accepted both at a cut-off rate of 6.50 per cent. There was no bid in the one-day reverse repo auction.

Trading in the government security market is likely to remain subdued tomorrow. A dealer said: "Market participants will wait for the auction result, as it will give an indication to which direction and by how much the prices will move. Hence till evening, we expect very few deals to happen." Call money rates, however, are expected to be in a range of 6.50 per cent to 6.75 per cent on the back of a very thin demand.