Liquidity in surplus on public issue refunds

MONEY MARKET ROUND-UP

Liquidity: In abundance
Liquidity remained comfortable in the market, with the Reserve Bank of India (RBI) absorbing around Rs 25,000 crore from the market through the sale of government securities through the reverse repo window.

According to dealers, the market also received funds after the refund of subscription to the initial public offer of Future Capital. Liquidity conditions are likely to ease further towards the end of the week, following the refund of allotments to the Reliance Power IPO.

Call rates, at which banks lend and borrow for daily fund requirement, closed at 6.50 per cent after reaching highs of 7-7.5 per cent during the day.

Even as the system is flush with liquidity, it is unevenly distributed since banks flush with funds cannot lend to others as they are restricted by the counterpart exposure limits and less capital base.

A bank can lend 25 per cent of its capital on an average daily in the call money market. Funds towards the subscription of the Reliance Power IPO are stuck with seven foreign and private sector banks.

G-sec: Yields fall
Prices of government securities (G-sec) fell across maturities by 15-20 paise disappointed by RBI move of not cutting policy rates on Tuesday.

Most of the banks have heavily bought government securities expecting a 25-basis point cut in the repo rate. This had pushed the yield on the ten-year benchmark paper down from 7.55 per cent to 7.39 per cent. However, the yield on the benchmark paper on Wednesday closed at 7.56 per cent.

The yield on the shorter end firmed up more than the longer term owing to concerns on liquidity. Reflecting the concern on the liquidity in the market, the cut-off yield on the 91- and 364-day treasury bills firmed up to 7.26 per cent and 7.48 per cent as against 7.18 per cent and 7.27 per cent respectively in the earlier auctions.

OIS and corporate bonds: Brisk trading
The interest rate in the overnight interest rate swap (OIS) market shot up sharply as a follow-up reaction to RBI's decision not to tinker with rates in the monetary policy review. Rates across maturities went up by 10-20 basis points.

Banks struck deals wherein they paid in fixed rate of interest and received in floating rate. The OIS is a derivative product based on the underlying of the interest rate on government securities. In the three-month segment, OIS rates moved up from 7.25 per cent to 7.42 per cent.

There was heavy selling of bonds both in the longer and shorter end of the maturity. According to dealers, issuers will wait for the sentiment in the interest rate to moderate before coming out with fresh issuance.

Mutual funds are busy selling commercial bonds and certificates of deposits (CDs) to remain liquid fearing redemption. One-year funds could be mopped through CDs at 9.02-9.05 per cent, said a dealer.

Rupee: Ends flat
The spot rupee opened bearish at 39.40 and dipped marginally to 39.43/39.44 before closing for the day at 39.40 to a dollar.

According to dealers, the market is witnessing an outflow of portfolio investments after the refund of the IPO subscription of Future Capital.

The annualised premia for the six-month and one-year forward dollars closed at 2.24 per cent and 1.84 per cent as against 2.35 per cent and 1.91 per cent respectively on Tuesday.