Forex Fears Drive Up Yield Outlook For Today'S 5-Year Paper Auction

Concerns on the forex front and its fall-out on domestic interest rates have led market players to revise upwards their expectation of the cut-off yield at the auction of five-year government paper for Rs 3,000 crore today.

"We expect a cut-off yield in the range of 11.75-80 per cent," said dealers in the government securities.

Before the rupee started to depreciate, two days ago, the market was rather bullish and would have taken a yield of around 11.70 per cent for the five-year paper. However, uncertainty has set in with an increase in call rate and a fall in security prices yesterday _ signalling a reversal in the bull run seen in the later part of last week.

 

The retention of the implicit cut-off yield given at the auction of 364-day t-bills yesterday at 9.04 per cent which saw a full subscription also goes to show that bids at the auction today may be on the higher side. "The market would have put in bids for t-bills at around 25 basis points lower if the sentiment had not turned around," said a dealer.

There is around Rs 2,700 crore locked in repos at present, which will be offset by the outflows of Rs 3000 crore on account of the auction. On Friday, there is a redemption of a 364-day t-bill for Rs 1,073 crore. Further, inflows to the tune of Rs 2,000 crore is expected next week on maturity of a government security, coupled with the inflows on account of the Resurgent India Bonds. Hence this time around, it is not liquidity which is a matter for concern. An exogenous factor _ likely measures that Reserve Bank of India (RBI) may take if the rupee depreciation continues, such as a hike in repo rate _ have begun to weigh on the minds of market players.

"Taking into account the uncertainty which has set in, there might be a devolvement of around 700 crore at the auction today," a section of the market feels. On the one hand, market players may ask for a higher yield, but, on the other, the RBI may not want to give it and send a signal of hardening interest rates when liquidity is not a problem. The RBI has also managed to offload the 11.95 per cent 2004 stock which had devolved on it to the extent of Rs 960 crore at the auction and this security has been taken off the apex bank's sale window.