Re rises on RBI chief's remark

MONEY MARKET ROUND-UP

Liquidity: Comfort zone
The liquidity situation was quite comfortable as Rs 11,000 crore entered the system by way of interest payments on special deposits. It was tight after an outflow of about Rs 35,000 crore following the advance tax payment in December 2007.

The Reserve Bank of India absorbed funds worth Rs 40,630 crore from the system today. The central bank had soaked in Rs 7,085 crore on Wednesday.

Call money rates ended closer to Reserve Bank of India's reverse repo rate of 6 per cent today on ample liquidity and low demand, dealers said. "There is surplus cash supply in the system and demand was also very low as we approach the end of reporting fortnight," said a dealer at a state-run bank.

The one-day call rate ended at 6.10-6.20 per cent, almost flat when compared with the opening level of 6.00-6.10 per cent, but higher than Wednesday's close of 2.75-2.90 per cent.

The sharp fall in inter-bank call money rate to a 5-month low was an aberration and the current liquidity level did not warrant such a low rate.

CBLOs were traded at a weighted average rate of 5.62 per cent, up from Wednesday's 4.88 per cent. The inter-bank repos transacted at a weighted average rate of 5.29 per cent, compared with 6.17 per cent on Wednesday.

G Sec: Declining trend
The bonds fell, reversing earlier gains, on speculation that yields at the lowest in more than five months encouraged investors to sell debt securities.

The yield on the 10-year note dropped to 7.75/78 per cent, the lowest since July earlier today on speculation that government spending at the end of last year boosted cash in the local banking system.

The increase in cash spurred concern the central bank will sell bonds to prevent surplus funds from stoking inflation, a trader with public sector bank said.

The liquidity situation has given rise to expectation that the central bank will sell bonds because of what liquidity can do to inflation. So the concern that debt supply will increase may keep yields under pressure in the next few days, he said.

The yield on the 7.99 per cent note due July 2017 rose 3 basis points to 7.77 per cent, according to the data available with RBI. It fell to as low as 7.74 earlier. Bonds rose earlier today as the cost of overnight funds fell to the lowest in almost a month, helping banks to buy debt securities with borrowed money.

The improving liquidity situation should help yields decline. There is a strong underlying demand for bonds at present, another trader with small public sector bank said.

Meanwhile, the RBI said six states including Maharashtra, Uttar Pradesh and Gujarat will raise Rs 5,833.30 crore through 10-year state development loans next week on January 07, 2008.

Forex: Rupee ends up
The rupee rose after the Reserve Bank of India governor suggested that intervention against the rupee would be less decisive in the future.

The sentiment was also boosted by capital inflows, including those slated for Reliance Power's upcoming initial public offering, dealers said. Players also liquidated long dollar positions after the stock market did not fall as sharply as expected.

The rupee ended at 39.39/40 a dollar, strengthening from the day's low of 39.475 and firmer than the previous close of 39.43/44.

RBI governor Y V Reddy said that it was necessary to encourage expectations of greater flexibility in the rupee exchange rate, and India is gradually moving towards that goal.

Reddy, however, cautioned that volatile exchange rate movements could be disruptive to the business environment.

The governor's comments made the market perk up. Perhaps the central bank has realised that rupee appreciation is likely to be a way of life this year and that it should not stand in the natural order of things too much.

The annualised premia for six month and one year forward dollars closed at 1.61 per cent and 1.24 per cent.