Call Set To Tango With Repo

MONEY MARKET

The cut in repo rate announced by Reserve Bank of India (RBI) will give a shot in the arm for the government securities segment which is likely to see a rally in prices during the week.

However, a rise in gilt tags cannot be construed as a revival of sentiment. The sustainability of the rally will depend on stability on the forex front.

The RBI uses the repo rate as a tool to signal a lower interest rate regime.

The repo rate cut at this point of time has come as a follow-up to the cut in incremental export refinance rate to four per cent and in view of the excess liquidity in the system.

There will also be a corresponding decline in forward premia in the foreign exchange market consequent to the cut in repo rate.

Call rates during the week will remain close to the repo rate level, as there is liquidity aplenty in the system and it is unlikely that the government comes out with another auction immediately in light of the Reserve Bank of India's willingness to take private placements until the sentiment improves.

Currently, there is a sum of Rs 7,952 crore locked up in the RBI fixed rate repos, which will come in during the week.

On the outflows side, the deadline for advance tax payments _ which is today _ will result in about Rs 3,000 crore going out of the system over the next couple of days, but this is not expected to have much of an impact on the call rate.

The secondary market for government securities has gone into a limbo in the recent past due to uncertainty regarding interest rates.

While the market perceives a hardening of interest rates in the future, the RBI has been strongly signalling that interest rates will be low.

The recent measures announced by RBI advising banks not to arbitrage between the money and forex markets had a positive effect on security prices on Friday but towards the end, hectic selling was witnessed. Saturday saw very low volumes in this segment.

The call rate opened between 6.05-6.15 per cent on Saturday, ruled in the range of 6.05-6.25 per cent and closed at 6-6.10 per cent.

Trading in the dated securities segment was totally lacklustre with very few deals reported. The zero coupon 2000 was traded at Rs 79.80 per cent.

There was an outflow of Rs 2,457 crore at the fixed rate repos on Saturday, and inflows amounted to around Rs 850 crore.

In the treasury bills segment, the bills maturing on October 9 was traded at 9.25 per cent and November bills at 9.50 per cent.