High oil prices compel companies to sell bonds

MONEY MARKET ROUND-UP

OIS: Rangebound yields
Indian Oil Corporation is raising around Rs 2000 crore and Bharat Petroleum mopped up around Rs 700 crore through the sale of oil bonds. Being quasi sovereign in nature, the oil bonds of IOC were offered at 8.40 per cent for a 15- year horizon.

There were no major issues in the primary bonds market while there was buying demand in the secondary market for the yield differential. The ten-year yield on corporate bonds rose to 9/9.10 per cent as against 8.75/8.85 per cent few days back.

Yields on the OIS remained rangebound since the outlook on interest rate is not certain in shorter term even if the general perception is that of moderation in the medium term.

Liquidity: Lingering comfort
The liquidity in the market remained comfortable with call rates closing at 6.10 per cent after falling to a low of 5.50 per cent. This was the result of RBI's intervention in purchasing dollars and stemming the rupee appreciation.

Even if the RBI was contracting sell buy swaps to postpone the immediate infusion of rupee liquidity into the market, it is also resorting to spot purchases as well fearing a sharp hike in the rupee premia on the forward dollars.

The RBI absorbed around Rs 40,000 crore from the market through reverse repo. Under reverse repo, the RBI sucks out liquidity from the market through sale of securities with the underlying agreement to buy it back at a later date.

The rates in the collateral lending and borrowing market (CBLO) fell below 5 per cent since mutual funds are flush with funds.

G-sec: Dampened sentiments
The prices of government securities fell during the day on fears of a oil price hike, but rose towards the end since banks preferred to re-enter at lower levels.

Compared to the closing levels on Tuesday, prices of government papers especially in the longer end of the maturity rose by 20 paise. The yield on the ten year benchmark paper closed flat at 7.55 per cent. Volumes were subdued at Rs 7500 crore.

Since the fear of oil price hike continued to dampen the market sentiment, the cut-off yield on the 11.30 per cent 2010 paper worked out higher at 7.54 per cent even as the market traded the paper at 7.50 per cent.

Rupee: High premia
The spot rupee opened at 39.30, but rose to a high of 39.25/26 to a dollar following heavy inflows towards the upcoming initial public offers. However aggressive intervention by the RBI pulled it down to 39.30.

The sell buy swaps by RBI kept the rupee premia high. The sell buy swaps are being contracted to postpone the immediate infusion of rupee liquidity to the system throughout dollar purchases.

The dollars are bought in spot market and sold in the forward market, to be bought back at a future date. In the process, the central bank pays rupees to book these forward dollars, which pushes up the interest rate in rupees for booking forward dollars.

Annualised premia for six month and one year forward dollars closed at 2.03 per cent and 1.61 per cent as against 2.07 per cent and 1.66 per cent respectively.