Gilts See Late Action As Central Bank Gives The Yields Message

The government securities market saw some action in the latter half of the week with the yield on the benchmark 10-year paper touching a lifetime low of 7.10 per cent on Friday.

However, this yield level could not be sustained as the Reserve Bank of India (RBI) immediately announced a price-based open market operation (OMO) auction of the same paper for Saturday to cool things down.

The central bank's OMO auction was not only to indicate that the low yields levels were unsustainable but also to absorb liquidity amounting to around Rs 11,000 crore that was to come into the banking system on Saturday on account of redemption of the 11.15 per cent 2002 paper coupled with the coupon payment on the 11.40 per cent 2008 paper.

 

At Saturday's Rs 6,000 crore OMO auction of the 7.40 per cent 2012 paper, the RBI received 135 bids amounting to Rs 7,328 crore. It accepted 120 bids for the targeted amount.

The central bank set a cut-off price of Rs 101.51 as against the ruling market price of Rs 101.70.

The cut-off is a clear indication that the RBI wants to nudge the yields up in a market which is otherwise being driven solely by the liquidity overhang.

On Wednesday, illiquid papers, also known as parking papers, moved up by around 15 paise due to buying interest emerging on account of their higher coupons.

On Tuesday, at the twin auction, the cut-off yield on the 30 year paper was set at 7.95 per cent. Immediately after the auction in the secondary market was dealt at an yield level of 7.91 per cent. The yield curve at the longer-end is getting flatter with the differential between the 30-year paper and the 10-year paper being around 74 basis points.

Call money ruled easy in the 5.65-5.75 per cent band due to abundant liquidity in the banking system.

In the forex market, the rupee ended last week firm at 48.50 to a dollar with the sentiment being positive. The week's highlight was the rupee piercing the psychological barrier of 48.50 per dollar to close at 48.4825/4875 on Wednesday. Except for Thursday, when the rupee ended weaker at 48.5250/5300, the local currency has been on a rise.

Meanwhile, India's foreign exchange reserves rose to $61.035 billion in the week ended August 23, 2002, from $60.639 billion in the previous week, the Reserve Bank of India (RBI) said in its weekly statistical supplement on Saturday.

The increase in forex reserves was solely on account of the foreign currency assets (FCAs) growing by $396 million in the reporting week. FCAs as on August 23 stood at $ 57.777 billion.

Gold reserves and special drawing rights remained static at $3.248 billion and $10 million, respectively.

Loans and advances by the Reserve Bank of India (RBI) to the central government stood at Rs 1,044 crore for the week ended August 23 compared with Rs 2,946 crore in the previous week.

Loans and advances to state governments fell to Rs 2,371 crore in the week to August 23 from Rs 2,991 crore in the previous week.