Gilts Crash Against Ayodhya Wall, Calls Rule High

Government security prices fell by 20-25 paise across maturities today as the uncertainty over the Ayodhya imbroglio continues to have its bearing on the market. Call money rates ruled in a high range of 6.50 per cent to 6.75 per cent, ahead of the advance tax outflow starting tomorrow.

Government security prices opened 15-20 paise lower and continued to dip. However, at a level of 40 paise -- down compared with yesterday's closing -- there was some buying interest which helped prices recover. Money market dealers said the volume of trading was low.

"The market was not sure about the plan of the Vishwa Hindu Parishad (VHP) and other religious organisations. This kept the market volume low, " a primary dealer said. He added that the advance tax outflow also contributed to the fall in prices of government paper.

 

The advance tax outflow which is expected to be in the range of Rs 8,000 crore to Rs 10,000 crore kept the call money rates high as well. Dealers said the public sector banks -- usual lenders in the overnight market -- were absent in the market during the morning hours. They came back in the afternoon and helped rates soften a bit.

There was no bid in the one-day repo and reverse repo auction today. According to dealers, banks did not want to part with their liquidity before the advance tax outflow.

"The reason why the call money rates were high is same as why there was no bid in the repo auction. Banks have taken a cautious approach before the outflow starting tomorrow," a dealer said.

Call rates are likely to be in the range of 6.50 per cent to 6.75 per cent even tomorrow. "The demand for overnight money is slightly higher as this is the first week of the reporting fortnight. Further, there will be slight liquidity strain due to advance tax outflow and hence the overnight rates are likely to rule high," the treasury head of a private sector bank said. The liquidity strain due to advance tax outflow will put pressure on the government security prices as well. However, according to the dealers, it is the development pertaining to the Ayodhya issue, which will hold the key to the price movement in the government security market.