Outflows fail to dent liquidity

MONEY MARKET ROUND-UP

Liquidity remained comfortable in the system even as the outlook turned bearish, given the outflows announced by RBI this week.

The market will see an auction of treasury bills for Rs 5,000 crore, the while government borrowing programme will suck out Rs 10,000 towards the end of the week.

Call rates, at which banks lend and borrow funds for their daily requirement, ruled around 5.5-6 per cent, while RBI absorbed around Rs 12,200 crore from the market under reverse repo. It did not infuse any additional funds into the market.

Similarly, rates in the collateralised lending and borrowing market (CLBO) also remained around the same levels of 6.10-6.5 per cent.

G-sec: High volumes
Volumes in government securities went up to Rs 12,000 crore as against the usual average of Rs 5,000-6,000 crore.

According to dealers, the market rallied since the sentiment turned bullish after the finance minister's suggestion to banks to cut lending and deposit rates.

Prices of the government paper in the longer end of the maturity went up by 70-80 paise, whereas the short- and medium-term paper witnessed prices moving up by 15-30 paise.

Another trigger for the market was the auction of the state development loan, which fetched cut-off yields of 8.06-8.07 per cent as against the market expectation of 8.10-8.25 per cent.

The shorter end of the yield curve, however, remained bearish since dealers feel the interest rate may firm up with tightness in liquidity.

OIS and corporate bonds: Bullish trend
Tracking the government security market, prices of corporate bonds also rallied mostly in long-term paper. There was no fresh issuance of corporate bonds either in the long-term segment nor in the shorter end of the yield curve.

However, there was brisk trading in the long-term corporate bonds and most of them witnessed yields falling by 5-6 basis points.

Dealers explained that the investment interest in the corporate bonds were mainly seen from insurance companies and pension funds. There was not much movement in the commercial paper or certificates of deposits (CDs).

Dealers feared that the investment might turn into losses since yields in the shorter end of the yield curve may firm up, following a tightness in liquidity towards the end of the week.

The OIS market witnessed brisk trading, but the bearish sentiment in liquidity was reflected in interest rates for the overnight interest rate swaps struck for the short term of three months to one year.

Compared with 6-7 basis points fall in yields, the shorter end of the OIS curve fell by only 2-3 basis points. While there were no trades in the three-month segment, the six-month maturity witnessed trades worth Rs 13,000 crore. Yields fell from 7.22 per cent to 7.20 per cent.

The overnight interest rate swap market is a derivative product based on the underlying of the interest rate on government securities.

Rupee: Ends high
The spot rupee opened weaker at 39.34 after closing last week at 39.31-32. However, panic selling of dollars by exporters led the rupee to reach a high of 39.21.

Dealers stated that at these levels, there was heavy intervention by RBI to buy dollars and stem the rupee appreciation. Consequently, the spot rupee weakened to close at 39.27-28.

According to dealers, RBI intervened by buying dollars in the spot market and releasing the rupee unlike the last week.  Last week, dealers said that the premia on forward dollars went up since RBI was booking dollars mopped up from the market to buy them back at a future date after purchasing them in the spot market.  Therefore, the yield in the six-month and one-year annualised premia came down from 1.82 per cent and 1.32 per cent to 1.50 per cent and 1.23 per cent respectively.