Money supply back in surplus
MONEY MARKET ROUND-UP
The system is back to a situation of surplus on the liquidity front, after being in deficit mode last week. The Reserve Bank of India absorbed around Rs 2300 from the system as against infusing Rs 10,000-20,000 crore last week.
According to dealers, one of the main reasons which has quelled tight liquidity situation is the assurance from the RBI to directly finance the oil companies under the open market operations. The central bank has opened one-to-one financing facility for the oil companies, both for foreign exchange and rupee liquidity, to meet the increased dollar and rupee demand.
Most of the public sector banks stayed away from the market last week as they were overstretched with short-term working capital needs from the oil companies. This further led the RBI to ease the exposure limits of banks to oil companies.
Secondly, this is the second week of the reporting Friday which falls on June 6. Since the banks have already covered most of the funds required to maintain CRR, they have surplus funds. The cash reserve ratio is the portion of the total deposits garnered by banks over a fortnight and deposited with the RBI as a statutory obligation. Out of the total funds to be maintained, a bank needs to maintain atleast 70 per cent on any given day.
Call rates at which banks lend and borrow funds from each other fell to a low of 6.10 per cent before closing at 7 per cent.
G-sec: Lacklustre trading
Even as the liquidity improved in the system, the trading sentiment in the government securities market remained lacklustre. According to dealers, the yields moved down only 1-2 basis points across maturities. The yield on the ten-year benchmark paper fell to 8.09 per cent as against a closing of 8.10 per cent last week.
Dealers explained that improved liquidity failed to cheer the market since it was apprehending strong monetary measures such as a CRR hike by the RBI to curb the money supply. This may be done either in the wake of a fuel price hike or inflation data which has already reached above 8 per cent.
OIS: Decline in prices
Mutual funds were major sellers of corporate bonds both in the short term and long term segments. Dealers said the MFs were selling to rejig their portfolios since the yields of the most bonds firmed up by 5-10 basis points, resulting in a loss in terms of prices. On the other hand, the Central Board of Trustees which manages the portfolio on behalf of employee provident funds, was the major buyer across segments, especially in long-term bonds.
The story on oil bond front was different as the market witnessed a demand for bonds, but no sellers. Dealers explained that since the oil companies now have the option to sell these bonds or pledge them with the RBI at market rates, they are not in a desperate position to sell. However strong buying demand for oil companies will emerge once there is clarity from the government on the fuel price hike or the RBI unveils the modalities of the open market operation, said a dealer.
In the long term, Power Finance Corporation issued bonds for three year, five year and ten year maturity at the rate of 9.55 per cent, 9.60 per cent and 9.68 per cent respectively.
State Bank of India, Oriental Bank of Commerce and State Bank of Patiala raised funds through three month, one year and six month certificate of deposits at 8.65 per cent, 9.15 per cent and 8.95 per cent respectively.
According to dealers, one of the mutual funds was desperate to subscribe and offered higher rate to buy these papers. Else, the yields on the CDs could have been higher, going by the bearish sentiment in the benchmark government security market.
The yields across maturities in the overnight interest rate market came down since liquidity improved. Overnight interest rate swap market is a derivative product based on the underlying of the interest rate on the government securities.