Re Keeps Rising Amid Insipidity, Yields Plumb Depths

There was moderate activity last week despite the abundance of positive triggers such as low inflation, high liquidity backed by foreign exchange inflows, paltry outflows, a base rate cut by the European Central Bank and the expectation of a rate cut by the US Federal Reserve.

A spurt in government security prices just did not happen as the participants were apprehending open market operations by the Reserve Bank of India (RBI). The week before the last, some ad hoc treasury bills were converted into special securities which fuelled fears of an OMO.

The buying binge came about only after a statement by an RBI official which put to rest an immediate OMO.

 

While the long-term gilts segment witnessed a 10-20 paise rally, yields at the short end were range-bound.

After the RBI assurance, gilt yields dipped to record lows and prices of corporate bonds took off. Fresh buying interest also emerged in the market with investors turning optimistic on softening of interest rates at least in the near term following easy liquidity conditions and a falling interest rate regime globally.

Inter-bank call money rates moved in the range of 4.85-5 per cent amid ample liquidity.

The only aberration came on Friday when call money lending was affected due to the absence of dealers owing to the cloudburst in Mumbai. This lifted the call rates to 5.30 per cent.

There was enough liquidity in the system but repo auction subscriptions were just around Rs 10,000 crore because dealers turned circumspect owing to OMO clouds.

But following the RBI statement, subscriptions zoomed up to around Rs 18,000-19,000 crore. The foreign exchange market, on the other hand, remained bullish with the spot rupee touching new highs almost every day and ending the week at 46.50/51 per dollar. The rupee opened last week at a 26-month high of 46.66/67.

Apart from steady foreign exchange inflows, the euro