Mumbai, April 27: State-run as well as private sector banks and most primary dealers (PDs) were rushing to buy securities across all maturities on the eve of the monetary and credit policy for the first half of 1998-99. Their positions were, however, confined mainly to long-dated securities as the market expects the yield across all maturities, particularly in the longer end, to fall after the policy.Most of these banks were seen selling short-dated securities in favour of long-dated ones, dealers said. The prices in government securities market on Monday shot up by 40-60 paise. At the longer end, prices went up by 50-60 paise, whereas for medium- and long-dated securities, prices went up by 25-40 paise. For long-dated securities, the market expects higher profit margin compared with short-dated securities.
According to dealers, the Reserve Bank of India has clearly given an indication that the yield to maturity (YTM) will fall across all maturities as the market expects a two per cent CRR cut and half aper cent bank rate cut in the credit policy.
"The expected interest rate cut has increased the demand for government securities across all maturities and most banks are currently buying long-dated securities to book profit. In addition, the central government's Rs 4,000 crore, 10-year paper -- to be auctioned on April 30 -- has created a buying pressure in the government securities market," said a dealer.
According to dealers, if everything goes as expected, most nationalised banks will book a huge profit. Another reason for the huge demand in government securities was the ample liquidity in the system as most banks were flush with funds.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
