Liquidity glut compels RBI to absorb Rs 25,000 crore

MONEY MARKET ROUND-UP

Liquidity: Mounting cash
Following a lacklustre credit policy, banks remained cautious in trading, leaving the system awash with liquidity. The Reserve Bank of India absorbed around Rs 25,000 crore from the market through the sale of securities (reverse repo).

The call rate, the rate at which banks lend and borrow securities for daily fund management, closed at 6.10 per cent. According to dealers, the market had already discounted 25 basis point cut in repo rate and bought government securities. Since the policy did not follow a cut in repo rates, there was selling pressure in the market, said a dealer.

Fearing redemption pressure, the collateralised lending and borrowing rate (CLBR) inched up to 6.50 per cent since mutual funds were wary of lending. The market has been expecting redemption since the equity market is going through bouts of correction daily.

However, the market expects mutual funds' liquidity to improve once the refunds of the subscription money come back to the system.

Government securities: Treading cautiously
The trading in the government securities market was cautious since banks were busy offloading government securities, anticipating a repo rate cut in the monetary policy review on Tuesday.

Prices in the securities market fell in the range of 40-80 paise across maturities. The fall in prices was more pronounced in the longer end of the maturity since banks had bought papers heavily in the 10-30 year segment.

The shorter end of the maturity remained flat since there was not much interest. Liquidity in the shorter term has been a critical factor following the subscription for Reliance Power's initial public offering.

According to dealers, even if the Federal Reserve cuts the rate by 25 basis points on January 30, it may not boost a rally in government securities. This is because the monetary policy review has outlined the inflation in the domestic market to be a critical factor overriding global factors.

RBI may auction the 91-day treasury bill (t-bill) at a cut off rate of 7.10 per cent as against 7 per cent last week, say bankers. Similarly, the cut off for the MSS bond of 2010 maturity may be auctioned at 7.45-7.47 per cent, as against the market yield of 7.41 per cent.

OIS and corporate bonds: Bearish outlook
The outlook on interest rates was bearish and this reflected in the interest rates in the overnight interest rate swap market.

This pushed up the rates in the one to five year maturity bonds by 10-15 basis points. Yields in the one year segment, which witnessed brisk trading, moved up from 6.63 per cent to 6.78 per cent.

Banks struck deals, wherein they paid fixed interest rates but received in floating rates of interest. The overnight interest rate swap market is a derivative product based on the underlying interest rate on government securities.

The corporate bond market also saw dull trading with the yields ruling flat. At the longer term end, the yield on the triple A bonds of ten-year maturity was around 9-9.05 per cent.

Rupee: Tracking equity markets
The spot rupee opened at 39.33/34 and fell to 39.42 to a dollar as foreign and private banks bought dollars tracking the profit taking in the equity market. There was marginal appreciation following dollar selling by exporters. The rupee closed at 39.38/39 to a dollar.

With the widening of the interest rate differential between the US and India, the annualised premia on the six-month and one-year forward dollars closed at 2.32 per cent and 1.95 per cent, respectively on Tuesday as against 2.15 per cent and 1.7 per cent.