The overnight rates hardened further on Thursday as they opened higher at 8.75-8.80 per cent, compared with their previous close of 7.75-8 per cent.

The rates tightened in the morning as a few traditional lenders in the market were quoting high rates. However, owing to little demand for funds from borrowers, the rates eased in the afternoon to the Reserve Bank of India repos level. They finally closed at 5 per cent. "Due to the negligible demand for funds, the traditional lenders blocked their funds in the RBI repos rate at 5 per cent," dealers said.

Demand for funds fell in the afternoon after which the rates eased, dealers said.

There are surplus funds in the system, dealers added. The RBI mopped up Rs 5,158 crore through a three-day fixed-rate repos in government of India dated securities.

FORECAST: The call money rates are expected to hover around 5-5.50 per cent on Friday.

Spot Dollar

The rupee weakened by 32 paise to close at 42.52/55 on Thursday ascorporate dollar demand gripped the market.

The rupee opened at 42.19/20, little changed from its previous close, and gained to an intra-day high of 42.14/15 owing to good dollar supplies. Heavy corporate demand for the dollar soon thereafter saw the rupee weaken to 42.40/42 before going still lower to 42.52/55.

Remittances by foreign institutional investors (FIIs) were cited as a reason for the rupee's weakening.

"It was payout at the Bombay Stock Exchange... FIIs could have remitted in the spot," dealers said.

Cash/spot was quoted at 4.50-5.50 paise and cash/tom at 1.50-2.00 paise.Elsewhere, the Reserve bank of India pegged its reference rate for the greenback at 42.36, compared with its previous peg of 42.29.

FORECAST: The rupee is seen in the 42.42-42.60 band on Friday.

Forward Premiums

Long-term forward premiums were quoted higher by 20-25 paise on Thursday in line with a weaker spot rupee, heavy covering by importers and bond auction results. April premiums closed at 358/363paise (333/340 paise), May at 393/395 paise (365/372 paise) and June at 425/430 paise (396/406 paise).

The six-month annualised forward cover was quoted at 10.20 per cent, compared with its previous close of 9.5 per cent. Dealers said that State Bank of India received December dollars, which closed at 201/204 paise.

"There was also a fair bit of covering by importers... reversing last three days' trend which saw importers cancelling forward contracts in line with a stronger spot rupee. Long forwards went higher as bond auction results on Wednesday indicate a perk-up in short-term interest rates," dealers said. Firmer call rates at 8.05-9.per cent in early trades saw premiums rise.

FORECAST: The six-month annualised cover is seen at 10.22-10.40 per cent on Friday.

Gilts

Even though the yields for the three new securities auctioned on Wednesday were a few basis points higher than the market rate, there were no takers for the new five-year government paper offering 11.75 per cent and the12-year paper offering an yield of 12.25 per cent.

However, the market lapped up the three-year paper maturing in 2001 offering a yield of 11.55 per cent. The three-year paper was traded above par in the government securities market on Thursday.

According to dealers, the three-year paper was traded 12 paise above par at Rs 112. The wholesale debt market of the NSE witnessed trading worth Rs 326.94 crore. The newly issued 11.55 per cent government loan maturing in 2001 was traded for Rs 95 crore at a weighted yield of 11.51 per cent. The 13.62 per cent government loan maturing in 1998 was traded for Rs 15 crore at a weighted yield of 8.41 per cent.

FORECAST: The yields in the government securities market are expected to firm up by the weekend.