Mumbai, Dec 20: The Reserve Bank of India's directive to banks to bring their nostro accounts into the 15-per cent limit in overseas investments has sent prices of government of India securities rocketing on Saturday.

The medium and the long-term securities reacted sharply as banks are still not ready to pick up short-dated securities due to the uncertainties in the interest rate scenario. This comes at a time when the prices of the medium- and the long-term papers were firming up as the effect of the short-term interest rates hike spilled over to the longer end of the market. The yields of these securities - which move in the reverse direction - have started coming down.

The interest rates firmed up as a fallout of the Reserve Bank decision to suck out excess liquity by incresing the CRR by 50 basis points. The objective of the central bank was to stem volatility in the foreign exchange markets and block the spilling over of excess liquidity into the forex market.

On Saturday, at least two foreign banks - ANZ Grindlays Bank and Standard Chartered - and a few public sector banks led by Dena Bank along with the new generation private sector banks started picking up securities in a big way, dealers said.

Bankers said that they will bring in the balances in their nostro account kept overseas, convert into rupees and invest in government securities. Although the new norm is effective from January 7, banks have already initiated the move as they expect that the sudden flush of funds into the banking system will drive prices of securities up.

Among the security prices which reacted to the new RBI norm on Saturday, were the 12.50 per cent gilt maturing in 2004, the 12.59 per cent gilt maturing in 2004, the 11.19 per cent gilt maturing in 2005 and the 10.85 per cent gilt maturing in 2001.

The 12.50 per cent gilt was trading at Rs 105 on Friday. On Saturday, a Rs 46-crore deal was struck for the paper at Rs 106.85, thereby registering a rise of Rs 1.85 on a single trading session.

The 12.59 per cent gilt maturing in 2004, which was trading at Rs 106.35 on Friday, traded at Rs 107.05 on Saturday.

"Trading banks have turned bullish in the securities market as they expect rupee funds to come after the new RBI norm comes into effect. I expect the securities prices of the long- and medium-term to rise further," a debt analyst in a leading brokerage firm said.

Bankers added the new norm is a double-edged one as the selling of dollars by the banks in the spot market will strengthen the rupee. At the same time it will ensure that the overnight call rates rule at the 9 per cent to 13 per cent level. "Most of the banks have exhausted their 15 per cent investment ceiling and hence they will have to bring the balances parked abroad into India," a dealer in a foreign bank said.

The RBI, on Friday, said that the overnight investments out of the nostro funds have recently become sizeable and, therefore, it has been decided to bring it under the 15 per cent ceiling. However, nostro funds on account of FCNR, resident foreign currency exchange earners foreign currency accounts will not be a part of the 15 per cent ceiling.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.