MUMBAI, Feb 5: The Reserve Bank of India's decision to enter in sell/buy transactions with the banks -- which triggered firming up of forward rates -- has virtually turned the securities market dead with both buyers and sellers staying away from it.Banks which look to the apex bank for interest rate movement are perplexed as they do not understand what the RBI has in mind. The central bank from January 23 to February 3 conducted buy/sell swaps which saw the call rates cooling and secutrity prices go up.
But just as liquidity began to ease and arbitrage opportunities once again rose between the forex and money market, the rupee came under pressure from speculatorss and the RBI decided to tighten liquidity by conducting sell/buy swap deals. This led to selling pressure from banks who wanted to get out of their portfolios, but there are no buyers.
This essentially reverses the trend existing in the securities market two weeks back when gilts were at the top of the trading list and big mutual funds likeReliance, Tata, Birla and blue-chip corporates led by Bajaj Auto, Hindustan Lever were falling over one another to buy short-term securites.Buyers are absent from the market due to the high uncertainity prevailing in the overnight call money market.
Meanwhile, banks are shunning long-term due to the uncertainity prevailing in the securities market which has shaken their confidence. However, provident fund, pension funds and trusts are picking up long-term securities to meet statutory requirements. Insurace companies, LIC and GIC are also buying some long-term securities like 12.59 per cent gilt maturing in 2004."Borrowers in the overnight call money market are not taking any position as the Reserve Bank has not giving any indication on the interest rate movement," said a dealer from a private bank. This is primarily one of the reasons why banks are keeping away from the securities market. "Once interest rates staiblise, banks especially the trading banks -- foreign and private sector -- will start buying,"a treasurer at a foreign bank said.Dealers also feel that the fall in the overnight call rate is a temporary phase and rates will again go up. "Most borrowers feel that there is no point is blocking money in securities," said a dealer from a foreign bank.Another reason cited by the money market dealers is that most banks are holding excess statutary reserve requirement. The Reserve Bank's reverse swap has sucked out liquidity from the system and this is the reason why securities market is heading towards south.
Dealers feel that this dull inactive state in the securities market will continue till March unless the central bank issues directives to activate the securites market.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
