Tight liquidity fuels call rates; Re surges ahead

MONEY MARKET ROUND-UP

Liquidity: Call rises
Call rates ended up today because banks, which did not access the Reserve Bank of India's (RBI) repo tender, stepped up borrowings in late trade to meet their mandated reserve needs.

The one-day call rate ended at 7.60-7.70 per cent compared with 7.00-7.25 per cent on Saturday for two-day loans.

Many banks did not borrow from repo window hoping that call rate could fall later in the day. But, this did not happen and they (banks) had to borrow from call money market to meet reserve needs, dealer with public-sector bank said.

Today, RBI injected just Rs 10 crore through its repo, sharply down from Rs 1,320 crore on Friday. Many banks had avoided RBI's repo hoping to meet reserve needs from CBLO where the rate had fallen to 7.26 per cent early on.

But CBLOs rate rose later on, and banks not being able to access RBI's repo tender after 10:30AM had to borrow from call money market which also kept rates up, dealers added. CBLOs were dealt at weighted average rate of 7.60 per cent today, down from 7.66 per cent on Saturday.

G-sec: Bullish trend
Government bond prices moved by over 20 paise today because investors bought bonds aggressively on expectations that liquidity was set to ease soon. The 10-year benchmark 7.99%, 2017 ended at 7.87 today compared with 7.90 per cent on Friday.

"Hopes that liquidity will ease off soon fuelled the rise today. This view was strengthened after Reserve Bank of India did not announce any bond auctions on Friday," said a dealer with state-owned bank.

RBI has announced weekly auction of Treasury bills for Rs 4,000 crore to be held on Wednesday. It also did not announce any bond auction under Market Stabilisation Scheme owing to the tight liquidity.

Most market participants had also expected RBI to announce the Rs 7,000 crore bond auctions, scheduled to be held between December 7 and December 14 according to government's tentative borrowing programme. But RBI did not announce these bond auctions either, which aided buying today.

Another reason cited by gilt dealers, which helped today's good sentiment was the growing expectation of a cut in interest rates by the US Federal Reserve at its policy meeting on December 11 and 12. A rate cut by the US Fed could boost inflows into India, as foreign investors would park more funds here to take advantage of the interest rate differential between the two countries.

Forex: Re shoots up
The rupee appreciated against the dollar by about 10 paise to close at Rs 39.50 to a US dollar on investment flows in capital markets and weak demand for green back from importers especially oil companies as they settled bills for the month.

The custodial banks were believed to have sold dollars on behalf of foreign institutional investors because of the over 1 per cent rise in local share market. Inflows in market were huge today, dealer with foreign bank said.

The dollar demand from state-run banks, suspected to be acting for Reserve Bank of India, checked the gains in the rupee. However, this demand tapered off towards the close of trade, helping the rupee to rise.

Foreign buying of local shares has been a key driver of the rupee, and dealers expect a wave of capital flows to hit the market if the US Federal Reserve cuts interest rates as expected on December 11. The rupee has gained about 12 per cent this year.

The annualised premium for six month and one year forward dollars moved up to close at 1.17 per cent and 0.95 per cent.