Call trades close to repo rate: Call rates traded close to 8 per cent throughout the last week. Near-term liquidity is comfortable after the first tranche of Resurgent India Bond (RIB) disbursal; the outstanding amount in repos at the end of the week was Rs 8,522 crore, and the number of applications has risen to double digits. Call rates are likely to rule marginally above 8 per cent this week.

Rupee sways on IMF and CTBT: Market see-sawed between bearish and bullish sentiments as the IMF's cautionary note on India was countered by improved chances of India and Pakistan signing nuclear treaties leading to removal of economic sanctions. The rupee ended the week flat at 42.50 a dollar. The rupee appears to have factored in most of the potential upside and is unlikely to strengthen from the current levels. We expect the trading range to be between 42.40and 42.60 this week.

No significant upside in treasury bills: Currently, three-month treasury bills are quoting around 9.5 per cent in the secondary market. With repo rates at 8 per cent holding call rates up, the yields on treasury bills are unlikely to ease significantly from the current levels.

Two-year auction likely to sail through: The market was bullish at the start of last week, and two-year yields eased to 11.25 per cent. However, with volatility surfacing in the forex markets, sentiments turned negative in money markets, too. Two-year secondary market yields have climbed to 11.30 per cent. The short tenor of the bond being auctioned places it in the favoured segment of most banks, many of whom have received the first installment of the RIB proceeds. The total bid amount is likely to exceed the notified amount of Rs 3,000 crore, and the issue should sail through near the 11.35 per cent cut-off. The yield curve has shifted up by 2-3 basis points over the last week. Though liquidity appearscomfortable, market sentiment is unlikely to improve sharply this week. The large number of banking holidays would also impact trading volumes significantly as most dealers would avoid taking a view across the long weekend. The curve is flat at the long end, and we advise investors to stay in the short- to medium-term securities.

Buy Capex bonds to beat inflation: WPI inflation has been ruling at around 8 per cent for the past few weeks. Despite a sharp fall in fuel group inflation on a year-on-year basis (following the increase in the base week), a sharp surge in prices of primary articles has sustained inflation over 8 per cent. With no let-up in the inflation rate, the capital index bond appears increasingly attractive. The fair value of the bond assuming 5 per cent annual average WPI inflation from August 1998 to August 2002 and average CPI-UNME inflation at 7 per cent is Rs 109.17. We have tabulated below the pre-tax equivalent semi-annual yields for different inflation/price scenarios, assuming 35per cent marginal tax rate and 20 per cent capital gains tax rate, and CPI inflation at 2 percentage points above WPI inflation.

Corporate paper:After the half-year end, we expect borrowing pressure from developmental financial institutions (DFIs) to ease, and hence an easing in secondary market yields as well as an improvement in secondary volumes. The maximum upside could be in the longer maturity segment (three to five years). We expect a similar easing in commercial papers after September 30 by about 25 basis points for three month secondary paper.

(For the week ending October 3, 1998)