Repo Auction Could Rev Up Calls

The rise in rates is expected to follow the four-day repos auction announced by the Reserve Bank of India (RBI). It is felt that the cut-off yield at the auction will be 4.5 per cent.

With this believed to act as the benchmark for the money markets, it could be inferred that calls will also quote around 4.5 per cent.

Banks are credited with the view that it would be more profitable park funds in four-day repos at present.

This, because the rates in the inter-bank money markets were quoting between 2.5 per cent and 3 per cent for the better part of last week.

It is better to invest surplus funds in these securities and get a return of 4.5 per cent instead of lending at 3 per cent and below, a dealer said.

The repos auction is expected to absorb excess liquidity from the system. The central bank has in the past resorted to this mode to rid the system of excess liquidity. Internationally, too, the repo rate works as a benchmark for interest rates. The present move by the RBI is seen as a step towards this end.

A few banks are of the opinion that the paper could garner Rs 2,000 crore. This is the excess which has come into the system, through the recent 0.5 per centage point cut in CRR requirements and will be pulled out by the RBI, a dealer said In the government securities market, the demand for gilts is expected be continue. Last week saw the yield on the 91-day treasury bills crash to the years low of 6.94 per cent.

Against a notified amount of Rs 500 crore, the paper drew a subscription of Rs 1,965.25 crore.

The RBI accepted 15 competitive bids against 1 non-competitive bid. The cut-off price stood at Rs 98.30 and the weighted average price of the paper was Rs 98.33.

The yields on the other short-term securities also slipped during the week. The bull run in the securities market is likely to continue through this week.

However, a section of the dealers are of the opinion that the yield on the on the 91-day paper could move upwards. With the surplus funds expected to be diverted to the four-day repos, a high demand for other securities is unlikely.

The commercial paper segment could well witness a resurgence of increased trading activity.

The lenders in the CP market are looking at rates between 11.75 per cent and 12 per cent, compared with 14 per cent before the busy season monetary policy.