Calls Stay In A Range, Liquidity Props Gilts

Call money rates remained range-bound in the band of 6.45 per cent to 6.70 per cent today. Favourable liquidity conditions continued to push up prices of long-term paper up by 25-30 paise.

Government security prices opened higher today and the continued to move up during the day. Dealers said the liquidity condition, which was easy enough, has improved further on account of dollar purchases by the state-run banks.

"The market has been saddled with excess liquidity and the situation at the India-Pakistan border has also cooled down. Hence, there were every precondition for the prices to move up. Dollar buying by the Reserve bank of India (RBI) through the state-run banks, and the absence of any open market operation have signalled that the central bank is comfortable with high prices. This caused the prices to rally," a primary dealer said.

 

In the call money market, the demand was very low as enough liquidity was pumped in through the purchase of dollars. The overnight rates opened in the range of 6.45 per cent to 6.70 per cent and stayed there throughout the day.

"Demand for overnight money is generally on the higher side during the first week of the reporting fortnight. However, this week, the demand is rather moderate as most of the banks, even some small ones, are flush with liquidity," said a dealer with a private sector bank.

The RBI today received four bids of Rs 255 crore at its one-day repo auction. The central bank accepted all the bids at a cut-off rate of 6.50 per cent. According to the dealers, public sector banks preferred to buy dollars rather than putting money in the repo auction and hence the bid was for a small amount. However, there was no bid in the one-day reverse repo auction.

Government security prices are likely to rally even tomorrow due to a favourable liquidity condition. A dealer with a foreign bank said the northward movement of the prices can only be stopped if the central bank conducts an open market operation. The easy liquidity will help the call rates to move around the refinance rates as well, said money market dealers.