Liquidity squeeze continues, Re ends higher at 39.41

MONEY MARKET ROUND-UP

Liquidity: Call slips
Liquidity was tight in the market as government spending is yet to pick up in any significant way. The money (Rs 35,000 crore) has flown out of system on account of payment of advance tax in the second week of December.

The Reserve Bank of India infused funds worth Rs 47,665 crore into the system under repo today. The infusion had touched the level of Rs 14,960 crore on Monday.

The RBI conducted auction for the 91-day (Rs 500 crore) and the 182-day bills (Rs 500 crore). The outflow of funds is expected on Friday. Keeping liquidity (tight fund position) in focus, RBI has not conducted t-bill auction for many weeks under the market stabilisation scheme.

Interbank call money rates ended at 7.85-7.95 per cent, slightly lower from Monday's close of 8.0-8.25 per cent.

With CBLO rates remaining at elevated levels (7.85-8.25 per cent), banks found its appropriate to tap LAF for borrowing from RBI at 7.75 per cent. They are moping up funds to meet reserve requirements.

Call rates trade near 6 per cent, the central bank's short-term reverse repo rate, when cash conditions are comfortable.

Some of the funds are expected to return to the system in the form of government spending, which could ease the squeeze on cash and free up some funds to invest in debt. But traders said expected outflows for new supplies would keep sentiment cautious.

G-sec: Low demand
Volume in the government securities market was very low at just around Rs 2,125 crore. There were few deals and market was flat, dealers said.

Indian central bond yields rose on Wednesday as a cash squeeze in the banking system dampened sentiment, but traders expect a significant improvement in available funds in coming days.

The yield on the 10-year government paper ended at 7.87 per cent, a notch higher from Monday's close of 7.86 per cent. The bond market was close on Tuesday for Christmas.

The central bank's calendar shows the government is scheduled to sell bonds worth Rs 10,000 crore between January 4 and 11. Traders expect the outflows to be neutralised by bond redemptions of around Rs 10,500 crore and payment of interest on a government-sponsored deposit scheme early next month.

Corporate bond market: Yields eased
Yields eased today by 2-3 basis points for 10-yr and 15-yr tenures taking cues from primary issuances (by banks) of similar maturity. Bank of Baroda will have an upper-tier II bond sale on Thursday at 9.30 per cent annualised rate.

Yields have been easing for primary bond issuances as most market participants feel interest rates may remain stable in 2008 and liquidity will improve. Thus, short-term rates were likely to ease and funding cost for banks might reduce next year, dealers said.

On Monday, State Bank of India's 10.10%, 2022 bonds were dealt at 9.32 per cent in the secondary market.

However, after the coupon on Bank of Baroda was set at 9.30 per cent, the yields eased in the secondary market by 3 bps and SBI's bonds were dealt at 9.28 per cent. The yields on the five-year bond remained unchanged amid scattered deals due to lack of buying interest.

Forex: Re up on inflows
The rupee today closed marginally higher at Rs 39.4150/4250 to a dollar on inflow of funds into the stock market, amid absence of month-end dollar demand from oil refiners.

The rupee has gained 17.50 paise in the last three sessions as anticipated dollar demand failed to emerge in the view of Christmas holidays in global markets.

In fairly active trade at the interbank foreign exchange (forex) market, the local currency moved in a range of 39.37 and 39.44 during the day after a steady start at 39.42/44 to a dollar from Monday's close of 39.44/45.

The rupee sentiment was boosted by the absence of dollar demand from oil refiners, which normally purchase the greenback to meet their oil import bills at the month end, forex dealers said.

They attributed the absence of month-end dollar demand to the closure of world crude markets due to the Christmas holidays. The annualised premiums on the six-month and one-year forward dollars closed at 1.89 per cent and 1.37 per cent, respectively.