Six-month forwards ease to lowest levels The rupee was steady through the week hovering close to 42.75 to a dollar. The local currency is expected to stay near this level this week too. Forward rates eased significantly. By the end of the week, six-month forwards were at 5.5 per cent, the lowest levels in the last 18 months. With call rates not expected to ease below 8.5 per cent, forwards are unlikely to ease further.

Little interest in 14-, 91-day T-bills

The new system of T-bill auction commenced this week with primary dealers obliged to bidtheir minimum bidding commitments. The 14-day T-bill auction received exactly 13 bids (one from each PD). With call rates not expected to ease below 8 per cent in the next two weeks, the only incentive to bid below this level for primary dealers is to achieve their required success ratio.Only one bid for Rs 50 crore was accepted at the 7.84 per cent cut-off set by RBI and the remaining Rs 50 crore devolved on RBI. It seems unrealistic for RBI to fix the 14-day cut-off below average expected call rates. Bidding is likely to be confined to primary dealers until the cut-off is re-aligned to secondary market levels. The 91-day treasury bill auction shared a similar fate with 85 per cent of the notified amount devolving on RBI.

Price-based auction a roaring success

All apprehensions of the market being confused about the price-based auction mechanism proved to be unfounded. The two securities: the 11.19 per cent 2005 and 12.32 per cent 2011 attracted strong participation.

The difference between thecut-off price and weighted average price were 4 paise and 5 paise respectively, implying about 1 basis point.

The market continues to be bullish despite tight call rates. Medium and long and securities firmed up further. The impact of high call rates was restricted to the short end with prices of one to three year securities falling by about 5 paise. The last CRR cut (announced in the credit policy) has convinced many market participants that RBI would not be averse to further liquidity infusion in case of tightness.

At current yields, potential upside at the short end is limited until call rates dip below 8 per cent. The Reserve Bank is expected to ensure that yields at the long end remain soft. Hence, the portfolio should have a bias towards longer maturity securities.

Corporate paper

Activity in short-term corporate paper has been adversely affected by persistent high call money rates.

Though the CP yield curve broadly held at 10-10.10 per cent for three months, 9.70- 9.80 per cent for twomonths and 9.25 per cent for one-month maturities, deals struck at these levels were few. Continued bullishness in the medium and long-end of the gilt market, is expected to maintain pressure on call rates. We do not expect the CP yield curve to move downward during this fortnight.

Lack of primary supply have reduced spreads of FI paper over sovereign yields since April.

Currently one year rates are at 11.5-11.6 per cent, while five-year rates are at 12.9-13 percent. We do not expect current spreads to narrow further and unless short-term liquidity improves, further decline in rates is not likely.