Rupee sheds intra-day gains, closes flat

MONEY MARKET ROUND-UP

Buoyed by the decision of the Federal Reserve to cut rate by 75 basis point and perceiving it as trigger for RBI to cut rates in the forthcoming monetary policy review, the prices of government securities market rallied across maturities.

While the prices in the long and medium term rose by 50-80 paise, they remained sticky for the short term. The yield on the benchmark 10-year paper fell to 7.39 per cent after reaching an intraday low of 7.34 per cent. The ten year yield had ended on Tuesday at 7.46 per cent.

The yield curve remained flat since the movements in the yields of the short term papers could not match up with the longer term papers.

While the RBI auctioned 182 day treasury bills at 7.25 per cent, ten year paper was available at 7.39 per cent. The cut-off yield for the 91 day t-bill worked out to 7.18 per cent against 7.02 per cent, reflecting the concerns on short term liquidity. Volumes in the gilts market hovered at Rs 11,000 crore.

Liquidity: Matter of concern
Liquidity was a concern since the RBI could mop up only around Rs 3505 crore from the market under reverse repo.

According to dealers, most of the liquidity is locked in the initial public offer of Reliance Power.

Call rates continued to remain higher at 7.5/7.75 per cent. The collateralised lending and borrowing rates also ruled higher since mutual funds remained wary of lending. Mutual funds faced heavy redemption from both retail and institutional investors in the wake of the liquidity crunch in the market.

State Bank of India, one of the major lending banks, was the major borrower of funds in the market.

According to dealers, the liquidity may ease after Thursday, when the Reliance IPO refunds start coming in.

OIS: Yields on the decline
The outlook for liquidity and interest rates remained benign in the medium to short term and this reflected on the yields for the overnight interest rate swaps.

Overnight interest rate swap market is derivative product based on the underlying of the interest rate on the government securities.

The yields came down across maturities since banks received fixed rate of interest and paid in floating rate to cover their interest rate liabilities.

Yields fell by 5-20 basis points, with the sharpest fall seen in the medium term maturity of one year from 6.66 per cent to 6.47 per cent.

There was buying interest in the long term corporate bonds in tune with the demand for government securities. Both banks and insurance companies bought bonds and as a result, the yield on the 10- year triple A corporate bonds fell from 9.10 per cent to 8.75 per cent.

There were no primary issues in the long term corporate bond market.

On the other hand, mutual funds sold commercial papers and certificate of deposits heavily to remain liquid. This pushed up the rates for three to six month CDs by 40-50 basis points.

Rupee: Volatility reigns
The spot rupee opened strong at 39.44/45, compared with Wednesday's close of 39.55, on expectations of FII inflows following the 75 basis point cut in US Fed rates. There was heavy selling of dollars by exporters and corporates.

But the RBI aggressively countered this by purchasing dollars. The rupee finally ended at 39.57/58 to a dollar. The premium on six month and one year forward dollars closed at 1.92 per cent and 1.54 per cent as against 1.70 per cent and 1.45 per cent on Tuesday.

International market: Euro, pound rise
The euro and pound rose against the dollar and ruled at $ 1.4584 ($1.4492) and $1.9548 ($1.9521). The yen fell to $105.76 ($106.78) against the dollar.