Rupee Gains Ground, Govt Papers Stay Flaccid

Despite good liquidity and a positive sentiment, the government securities market remained lacklustre for most of last week.

While the week started on the bullish note, rising forward premiums on dollars triggered a selling spree. The entire market was overbought at good levels and was waiting for good levels to offload.

There was not much demand, which kept the market almost inactive with the yields on the longer end flattening. The spread between government securities of 1 year and 10 year tenor has narrowed. Yeilds of short term papers have gone up while the long-term remained rangebound.

Incidentally, the Reserve Bank of India stated that there is no scope for a cut in the repo rate for now and that such a move in future will be contingent upon the rate of inflation and the monsoons. This has made the market wary on the long-term outlook on interest rates.

 

Call rates in the initial part of the week remained tight as stagnation in long-term yields made bankers and primary dealers run for covering up short positions.

During the later part of the week, players became reluctant to take fresh positions in preparation for the advance tax outflows due this week. In fact, the whole week witnessed prices hardly moving beyond the range of 5-6 paise.

Repo subscriptions also came down during the week from Rs 18000 crore to around Rs 2000 crore. The liquidity flow was restricted due to apprehensions of open market operations (OMO) and the reporting Friday.

State government loan was well subscribed to by all market participants for good interest rate differentials. While bidding interest came from all corners, the paper was mainly targeted by funds and trusts as a long-term investment.

Although this auction did not have much effect on the market as liquidity was ample, the conversion of ad-hoc treasury bills into government securities came as a warning to the market.

The rupee had a good run last week, firming up to Rs 46.60 levels to a dollar. Foreign exchange inflows in the form of portfolio investments by foreign institutional investors pulled the rupee down further. It moved in the range of Rs 46.66/73. The dollar depreciation to euro globally has also helped the rupee to appreciate.

While spot rupee went up, there was still pressure on forward premiums. Constant demand for dollars especially in the near term pushed up forward premiums on the dollar . The premium ruled in the range of 3.5-3.7 per cent for one month and 2.0-2.10 per cent for one year.

Another factor that pushed up premiums was the absence of selling of dollars by exporters. Fearing a further appreciation of the rupee against the dollar, exporters are adopting a wait-and-watch policy.

The market is glued to the Federal Reserve meeting slated for next week where a rate cut is expected.