Interest Rates Dip On Ample Liquidity

Interest rates, which showed signs of hardening in the first quarter of this year on concerns over the large government-borrowing programme for the financial year, have fallen lately. The liquidity situation at the moment is being viewed as comfortable, and bankers say that the situation may continue to be easy till there is an improvement in credit offtake.

Moreover, the market seems to be drawing comfort from the fact that the government's gross borrowing programme is almost 75 per cent through even before the start of what is traditionally called the busy season. Expected inflows on account of the Resurgent India Bonds (RIB) have also contributed to this turnaround in the sentiment.

 

The higher yields given at last week's auctions should therefore be placed in the context of volatility in the forex markets and not as a general trend of rising interest rates. The RBI hiked the implicit cut-off yields on the 14-day and 91-day treasury bills at the latest auction to 6.80 per cent and 7.77 per cent, respectively. Five-year paper was auctioned at a cut-off yield of 11.78 per cent, in line with expectations.

According to the latest I-Sec debt market update, "the yield curve has shifted downwards during the fortnight, by about 15 basis points (BPs) at the short-end and five BPs at the long-end. During the next fortnight, prices are likely to be firm due to comfortable liquidity conditions." Thus the main threat would be from a volatile rupee and pressure on forward rates, the report added.

However, the report says, "the four-seven year bucket is unlikely to appreciate as the current RBI sale list has capped prices." On Friday, the apex bank also revised the list of securities on its sale window, signalling slightly lower rates on medium-to-long-dated stocks. It is offering the 13.05 per cent 2007 (nine-year paper) at Rs 104.99 (12.10 per cent), against an yield of 12.13 per cent offered on the 11.90 per cent 2007 security, recently taken off the price list. On July 30, the same security was offered at an implied yield of 12.15 per cent. The 12.15 per cent 2008 is being offered at Rs 99.91 (12.16 per cent), against an yield of 12.22 per cent on the primary market curve. The 11.19 per cent 2005 is being sold at Rs 96.39 (11.97 per cent).

A recent study by SBI Caps also reiterates the view that interest rates may not rise as feared till the end of this fiscal. "We expect RBI to continue signalling lower interest rates in spite of the depreciation of the rupee.

There might be temporary measures to increase short-term rates, but the general trend would be southwards."

The study has predicted that the abundant liquidity would result in a broad money supply (M3) growth of 17 per cent and deposits by 17-18 per cent for the financial year 1999.

A firming up of rates, however, may take place towards the end of the fiscal as the abundant liquidity and low rates may increase aggregate demand faster than expected, the study has said.