Impending Conflict Slashes Gilts, Call Cushioned By Liquidity

Call rates today moved in the 6.85-7.15 per cent band on the back of easy liquidity. The government securities (gilts) prices at the medium and long end fell sharply by about 50-60 paise even as the threat of the US conducting air strikes on Afghanistan tomorrow impacted the trading sentiment.

Call rates opened marginally higher at 7.00-7.25 per cent against the previous close of 6.90-7.00 per cent. But comfortable liquidity saw call end the day at the 6.95 per cent levels.

"The undertone in the government securities market was overshadowed by the fears of US strike against the ruling Taliban in Afghanistan. Gilts prices fell despite the call money market being awash with liquidity," a dealer with a private sector bank said.

 

Inflows into the banking system have been estimated at Rs 15.112 crore while the outflows were Rs 1,220 crore. The net outflows have been estimated at Rs 1,205 crore.

At the two-day repo auction held under the liquidity adjustment facility (LAF), the RBI received one application for Rs 300 crore and accepted the same at a cut-off rate of 6.50 per cent. This single bid underscores the fact that liquidity is aplenty in the banking system. The central bank did not receive any bid for the reverse repo auction.

Traders adopted a wait-and-watch stand in the government securities market as the possibility of a US-Afghan flare up resurfaced and the rupee depreciated by 10 paise.

The benchmark 11.50 per cent 2011 paper started the day at Rs 115.40 and fell steadily to close at Rs 114.80, thereby registering a decline of 60 paise. The other benchmark papers, the 11.40 per cent 2008 paper fell by 45 paise to Rs 115 and the 11.03 per cent 2012 paper fell by 50 paise to close at Rs 111.15.

"There was some buying interest at lower levels in the gilts market. The current prices are holding only because the RBI is purchasing the securities at higher prices," said a dealer.

Both the money and the gilts markets will be closed tomorrow on account of Mahatma Gandhi Jayanti.

Call is expected to be in the 7.00-7.25 per cent range on Wednesday backed by ample liquidity. Dealers, however, do not rule out the possibility of calls edging higher to 7.50 per cent as the reporting Friday is fast approaching. The gilts price movements will hinge on further developments in the US-Afghan conflict.