Liquidity, On Paper

Developments along the border will continue to influence the government securities market over the next month. But the Reserve Bank of India (RBI) reaffirmed its commitment to ensuring adequate liquidity and maintaining its soft interest rate bias on Tuesday, when it advised the government to make a private placement of Rs 6,000 crore of paper instead of dumping it on the market through an auction. That simple act has gone a long way towards assuring dealers that RBI is alive to the razor-edge stability in the market.

Money market dealers who were concerned over a probable India-Pakistan war now feel that there is no such possibility, at least in the coming month. Over the past few weeks, yields appreciated substantially on the back of India-Pakistan border tension. The yield of 10-year paper increased from 7.3 per cent in the beginning of May to 7.84 per cent on May 27. Of course, the rise in yield in May had started after the market expectations from the credit policy went unrealised.

The central bank did not cut the bank rate, as hoped, and a 50 basis points cut in the cash reserve ratio (CRR) was promised but not effected. However, dealers said that these measures could have raised the yield of 10-year paper to 7.5 per cent but no more. It is the deterioration of the situation on the border that aggravated the problem.

The primary boost to market sentiment came from Tuesday