Gilts Spiral Up As Cash-Rich Banks Find Parking Place

Call money rates continued to hover around the repo rate of 6.50 per cent today, while government security prices rallied by 40-50 paise at the medium-to-long end of the market.

Call kicked off today between 6.70 and 6.75 per cent but dropped to 6.50 per cent within a hour of trading. It remained there throughout the session.

Some lenders were quoting a bit higher than the repo rate in the morning, but there was very less demand, according to a dealer. "This forced the lenders to bring down the rates."

The Reserve Bank of India (RBI) today received three bids of Rs 9,820 crore in its one-day repo auction.

The central bank accepted all the bids at a cut-off rate of 6.50 per cent. The RBI did not receive any bid for its one-day reverse repo auction.

Dealers said large public sector banks, which have been saddled with excess liquidity, put money into repo because there was little demand in the call market.

Government security prices rallied by 40-50 paise helped by the good liquidity conditions.

A dealer with a private sector bank said liquidity has improved after the first round of cash reserve ratio cut taking effect on November 3, but the credit offtake has not improved. "This has forced the public sector banks to invest more into government security."

The RBI governor Bimal Jalan's statement that the central bank will continue its bias for softer interest rate also helped the prices to rise, said the dealers.

Call money rates are likely to remain in the range of 6.50 per cent to 6.75 per cent tomorrow with liquidity condition remaining unchanged.

In gilts, security prices are likely to stage short rallies. Dealers, however, are expecting the RBI to announce an auction by the end of the week. "Due to this expectation there may be some amount of profit-booking after the initial rally," said a dealer.