Tax Outflows Could Keep Calls High

Dealers inthe money market are of the opinion that the firmness in the money market could persist for some time owing to the advance tax outflows.

However, it is unlikely that the 11-per cent threshold will be breached as the banks can draw down their export refinance quotas.

Last week, the money markets remained tight on account of the subscription to the Rs 2000 crore six-year paper.

The cut-off yield on this paper was fixed at 13.82 per cent, in line with the expectations in the money market.

Rumours of a one percentage point cut in the cash reserve ratio (CRR) triggered off a veritable buying spree in the government of India securities market on Friday.

However, banks were amenable to buying the 13.82-per cent six-year paper in the secondary market. Most primary dealers had offloaded the security after it was put up for auction on Tuesday.

Despite the high yield offered, the paper devolved by almost 50 per cent. Most of the primary dealers (PDs), who participated at the auction, sold the paper to banks. It was believed that the banks were being offered a discount of almost 30 paise on the security.

Banks purchased the paper primarily because of the commission that the primary dealers were offering to them.

Most of the primary dealers are offering a commission of 25 paise on the government securities.

Some of the dealers have gone a step ahead, and are reported to be offering a commission of 50 paise. The sharing of commission with banks means that primary dealers are selling the gilts at a lower price. Alternatively, it means higher yields for the buyer.

This, in a large measure, explains the moderate trading in the new six-year paper.

The tightness in the inter-bank money markets led to an increase in the cut-off yield on the 91-day treasury bills. The yield rose from 10.03 per cent to 10.16 per cent in the last auction on Friday.

Despite offering a higher yield, 30 per cent of the paper devolved on the Reserve Bank of India and the primary dealers.

The number of competitive bids stood at 22, whereas they had been higher in the earlier auctions. There was only one non-competitive bid.

The cut-off price of the 91-day paper stood at Rs 97.53 and the weighted average price of the issue stood at Rs 97.54. Trading in the commercial paper segment is seen to be subdued.