Calls Likely To Decline Further

MONEY MARKET

Overnight interest rates in the inter-bank money market is likely to decline from the current level of nine per cent, because this is a reporting week and most banks would have covered their positions.

Last week the rates shot up to 10 per cent after the government mopped up over Rs 4,500 crore by selling the 12.59 per cent on tap basis. By Saturday, the call rates came down to rule in the band of three per cent to 5.75 per cent and closed in the region of 4.50 per cent.

It appears that liquidity will not be at a premium, for there is sufficient liquidity in the banking system. This is brought out by the fact that the Reserve Bank of India (RBI) received bids aggregating Rs 3,400 crore at the repos auction held on Friday.

 

The RBI had accepted only one bid for a sum of Rs 250 crore at the cut-off repos rate of four per cent.

As is obvious the Bank Rate will act as a ceiling to the call rates for banks will avail of refinance from RBI the moment the calls reach 10 per cent. Two banks are reported to have availed of refinance from the central bank.

The price rise in the securities market is likely to continue subsequent to the cut in the Bank Rate. The RBI has sent a strong signal that interest rates are headed down. In fact, the secondary market yields have already undergone the necessary adjustment. However further decline in the yields is most likely because there does appear to be pent up demand in the system. At the same time there will be a likely flow of funds from government securities to corporate bonds. The initial trends were there last week when banks sold 10-year paper which were fetching 12.60 per cent and subscribed to the IDBI bonds. IDBI was offering 13.50 per cent for five years.

There is hardly a 10-basis point difference between a seven-year and a ten-year government security. With the 12.59 per cent still in great demand it is expected to command a premium in the region of Re 1 in the coming week. This would imply that the yield of this paper will drop.

Simultaneously the focus will then shift to the 13.05 per cent 2007 in which there is not much action at present. There has also been a lot of activity in the 12.14 per cent 2000. There has been some volatility in the prices of both the 12.59 per cent 2004 and the 12.14 per cent 2000.

The activity in the treasury bills segment will be determined by the levels at which the calls will rule.

There has hardly been any activity in the 14-day treasury bills. It remains to be seen if the action in the 91-day treasury bills will pick up now that the yields are declining.