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Call money rates ease: Call rates declined sharply during the second week of the reporting fortnight, staying close to 8 per cent for most of the period. The overall liquidity has also improved: The total amount outstanding in repos at the end of the week was Rs 4,182 crore. The rates are likely to be marginally tighter this week, between 8.5 per cent and 9 per cent.
Private placement boosts sentiment: On Monday, government securities worth Rs 5,000 crore were privately placed with RBI. This is in line with the RBI's stated tactic of privately placing securities and later offloading them through the open market operations (OMO) sale window when market conditions improve. The market was expecting an auction announcement, but with the private placement reducing ways and means advance (WMA) balances, the probability of an imminent auction reduced. This, in turn, provided a boost to market sentiment. Treasury bills and bonds with maturities of up to two years rallied. However, the RBI OMO saleprice capped the rally.
Lower cut-off in treasury bills: Lower call rates combined with an improved short-term outlook resulted in a better demand for treasury bills. The 364-day treasury bill with a notified amount of Rs 400 crore witnessed bids for Rs 1,340 crore. The cut-off declined from 10.75 per cent to 10.70 per cent. The 91-day treasury bill auction also evoked a strong response. The auction was the first under the new uniform price mechanism and the cut-off at 9.53 per cent was 50 basis points lower than the previous week's cut-off. However, with the repo rate at 8 per cent, there is not much room for the 91-day yields to decline significantly from current levels.
OMO sales: The demand for securities resulted in improved sales at the RBI OMO window during last week. Till Friday, approximately Rs 140 crore of 11.40 per cent 2000 securities were sold. In addition, an estimated Rs 738 crore of 91-day treasury bills and Rs 334 crore of 364-day treasury bills were also sold.
Theborrowing programme: Of the planned gross borrowing programme of Rs 79,376 crore, Rs 72,821 crore has been completed. With 10 remaining auctions of 364-day treasury bills expected to raise about Rs 4000 crore, only one more issue is required to complete the budgeted borrowing. Which brings us to the question: Will the total borrowing stay within budgeted limits?
Last year, the budgeted gross borrowing programme was Rs 52,963 crore, and the actual figure at Rs 59,637 crore exceeded the target by Rs 6,674 crore. The fiscal deficit exceeded the targeted figure by about Rs 21,000 crore last year. This was funded by about Rs 12,000 crore through small savings, PPF, PFs etc and about Rs 2,300 crore draw-down of opening cash balances in addition to the above incremental market borrowing.
The fiscal deficit is likely to exceed the budgeted amount by at least Rs 10,000 crore assuming that the planned Rs 5,000-crore PSU disinvestment target is achieved. The shortfall is mainly under the indirect taxes head, aresult of industrial as well as trade slowdown.
Following last year's performance, the budgeted amount under small savings, PFs etc, has been increased by over Rs 11,000 crore from last year's budgeted figures. Consequently, we do not expect actual collections to be much above the budgeted amount. Most of the fiscal slippage would have to be financed through market borrowings. Considering that RBI has already monetised about Rs 14,000 crore this year (which is planned to be sold through OMO), incremental borrowing of about Rs 10,000 crore would provide sufficient primary supply of securities to inhibit a significant easing of yields.
RBI's dilemma: Sell securities or let rates ease? The overall liquidity appears comfortable with a net inflow of about Rs 650 crore into the system this week. However, a price rally is unlikely to extend beyond two years due to RBI's sale window. Considering the above apprehensions, it appears that RBI is bracing itself for further monetisation by aggressively sellingsecurities. With RBI's priority being the unloading of securities, and a large supply of two-year securities available at 11.32 per cent yield, the yield curve cannot shift downwards in this segment. This is also holding up yields in the three-year segment. The upside from current levels in the less than one-year segment is limited as long as the repo rate is at 8 per cent. Concentrate in the one- to three-year segments on hopes that RBI would exhaust its holding of the 11.40 per cent 2000 security, subsequently allowing the yield curve to move downwards.
(for the week ending November 14)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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