Overnights Seen Around 6%

MONEY MARKET

Interest rates in the inter-bank overnight money market are expected to rule in the 5-8 per cent band during this week. The rates could taper off by the end of the week.

There will be a significant movement in prices after the credit policy announcement on Tuesday and volumes are also expected to pick up.

Banks which have built up positions on the expectation of a decline in the yields will resort to profit-taking.

Not only is the Reserve Bank of India (RBI) expected to make additional resources available to the banks by reducing the statuary preemptions, the policy will be geared towards creating an environment which will facilitate further reductions in long-term rates. The RBI governor has maintained that there is a scope for further reduction in interest rates provided inflation could be maintained around four per cent.

Last week overnight interest rates ruled at an average of 5.5 per cent. At the last couple of repos auction the apex bank has not received any bids. Banks continued to park their surplus funds in 14-day treasury bills. At the auction on Friday, the central bank received three competitive bids for Rs 2,400 crore and no non-competitive bids.

At the cut-off yield of 4.96 per cent RBI accepted all the three bids and the primary dealers had to chip-in with Rs 100 core as part of their underwriting commitment. There was a dramatic increase in the response at the week's auction of 91-day treasury bills. Against the notified amount of Rs 300 crore, RBI received 11 competitive bids for a sum of Rs 3,280 crore and a couple of non-competitive bids for Rs 400 crore.

It was after quite some time that competitive bidders have evinced interest in this instrument. At the cut-off yield of 6.89 per cent the issue sailed through without any devolvement.

Secondary market yields on treasury bills softened further last week. The 364-day treasury bills maturing on October 9, 1998, were traded at 8.15 per cent, while those maturing on July 31, 1998, at eight per cent. At the shorter end, the 91-day treasury bills maturing on January 3, 1998, were traded at 6.60 per cent.

In the securities market prices held their ground. The 13.62 per cent paper maturing in 1998 was traded at Rs 103.95, while the 10.85 per cent 2001 at Rs 101.25. The 11.19 per cent security maturing in 2005 commanded a premium of 40 paise to 45 paise, while the 11.15 per cent 2002 was traded in the Rs 100.75-100.85 band. Among other securities, the 11.83 per cent 2003 and the 12.59 per cent 2004 were traded at Rs 104.