Auction Fears, Profit-Booking Curb Gilts

Concern over a further auction of government security and heavy profit-booking, kept the government security market little changed despite the reduction of the cash reserve ratio (CRR) by the Reserve Bank of India (RBI) and an expectation of further cut in the Fed rate.

Prices, rallied by 25-40 paise at the medium to longer end of the market in the morning, but came down as the players resorted to heavy profit-booking. The chief dealer of a new private sector bank said, "the players have already accumulated a huge stock of government security due to the auctions conducted by RBI in April. The 50 basis point cut in the CRR, which will release Rs 4,500 crore of liquidity cannot make up for that."

 

He mentioned that the central bank has raised Rs 28,000 crore from the market in April, through the auction of dated papers. "Even the Fed rate cut announcement is unlikely to have any major impact on the market as it has already been discounted," the dealer said.

A primary dealer said the shortage of liquidity in the system was evident as players resorted to the reverse repo for their short-term needs. "In the current reporting fortnight, the average reverse repo inflow averaged over Rs 3,650 crore and hence in such a situation, Rs 4,500 crore is unlikely to improve the market liquidity substantially," he said. The inflow was in contrast with the repo outflows during the first three weeks of April, averaged over Rs 16,000 crore.

The dealers are also concerned over fact that the recent ways and means of advances figure rose to Rs 9,109 crore (close to the upper limit of Rs 10,000 crore) on March 5. The treasury head of a private sector bank said, " it seems the RBI will have to announce another auction by the weekend. This will take away the effect of CRR cut." A chief dealer with a private sector bank said, "the announcement of CRR cut was just to make space for government auction."

In line with the government security market, the corporate bond market also remained dull as the dealers see the excess liquidity will be absorbed by further auction of government security.

Call rates, however, came down a bit compared to Friday, to remain in the range of 8.50 per cent to nine per cent. Overnight rates were in the range of 8.80 per cent to 9.50 per cent on Friday.