Mint Street Throws A Wet Blanket On Rate-Cut Punters

Last week the money market opened on a positive note driven partly by speculation of a cut in the bank rate.

However, the statement by the Reserve Bank of India (RBI) governor Bimal Jalan on Friday ruling out a cut in the bank rate and the repo rate in the near future impacted sentiment.

Trading in government securities was flat for most part of the week. Prices largely remained rangebound. On Friday, the market turned volatile and the prices recovered after an initial correction subsequent to Jalan's remarks of continuing with soft interest rates, and his first indication that inflation should remain benign despite drought conditions.

 

News across the border of an air attack on Pakistan on Friday, and its subsequent denial by the Indian Army, did not dent prices sharply. But there was some selling pressure as players booked marginal profits during the day.

The on-tap auction of state government loans on Monday of Rs 4,478 crore saw an oversubscription with the RBI retaining excess subscriptions of up to 20 per cent for the states. The states' securities attracted buying interest since the yield of 7.80 per cent was better than the 7.19 per cent on 10-year Central government paper.

Excess liquidity continued to keep the prices rangebound with an upward bias. Traders, however, stayed on the sidelines.

There was cautious sentiment among players as they chose not to build up significant positions for want of any indication of where the interest rates are headed.

The government security prices remained rangebound as there was no reason for players to offload their existing positions.

The Reserve Bank of India announced a twin auction on Thursday, which was Rs 1,000 crore less than the notified amount as per the issuance calendar.

There will be a twin auction on August 27 for Rs 5,000 crore for a new 15-year paper, for and Rs 2,000 crore for a new 30-year security.

The reduction in the amount of paper coming up for auction had little impact on the market on Friday as this had been discounted by the players.

The RBI also deviated from its schedule in terms of the tenor of the longer-term security -- 30-year bond -- instead of the scheduled 20-year paper. The new security will now be the bond with longest tenor, displacing the 2026 paper.

Dealers said this will help lengthen the yield curve to 30 years, thereby provide a benchmark at the longer end.

The 10-year benchmark yield ended flat at 7.18 per cent, after trading in a narrow of 7.16-7.19 per cent range through the week.

Meanwhile, in the overnight funds market, the rates continued to rule easy at 5.60-5.75 per cent given the abundant liquidity in the system.

There was a temporary dip in the rates: the call rates touched 5.00 per cent on the reporting Friday. Despite outflows of about Rs 5,000 crore on Monday towards the state government loans' auction, there was no impact on liquidity. This was reflected in the quantum of daily average inflow of Rs 12,770 crore entering repo auctions.

Demand for overnight funds tapered towards the end of the week as players had already covered their cash reserve requirements, squaring off their positions well ahead of the reporting Friday. The outstanding refinance levels equally reflected the liquidity position as the availed amount of refinance stood at just Rs 8.98 crore.

For the corporate bonds market, it was a mixed week. Players remained undecisive and the volume of daily trades ranged from a low of Rs 85 crore to as high as Rs 200 crore. Keen interest in corporate bonds picked up during the latter part of the week following better arbitrage opportunities in corporate bonds than in government papers.

Meanwhile, the rupee's dream-run was spoiled by the rumours of border tensions. The currency slipped to 48.54 against the dollar in late trades on Friday. It started the week on a flat note, remaining motionless for most part of the week at 48.56.

Corporate demand for dollars was seen during the week, causing the currency to blip to 48.58, and briefly to 48.61 on Tuesday. A jump in oil prices added to the discomfort of the dealers. However, overall, there was continuous supply of greenback from large corporates, FIIs, exporters, and NRI remittances.

Even state-run banks have been mopping up dollars from the market, with the result that the rupee gradually firmed up against the dollar.

For the week ended August 16, foreign exchange reserves have seen a rise of around $609 million to $ 60.639 billion. Gold reserves remained static at $ 3.248 billion, while the special drawing rights (SDRs) fell slightly to $10 million for the week ended August 16 from $13 million in the previous week.

Forward premiums tracked the spot rupee with the six-month annualised premium closing at 4.11 per cent on Friday after touching 4.10 per cent on August 22.

The premiums declined as exporters were continuously selling their forward dollars and importers stayed out of the market.