Rupee stages a smart rally: The rupee staged an unexpected rally on Monday touching 42.26 against the dollar and 42.46 before stabilising near 42.35. The rupee has been helped by the weakness in the dollar against other currencies. The biggest loss was against the Japanese yen which appreciated to 115 level against the dollar during the week, about 30 per cent gain from the lows seen a couple of months back. The market seems to believe that the US economy was weakening and more cuts in interest rates were forthcoming. The Dow was weak, and US treasuries (which had earlier gained on safe haven status) also slid following the dollar's crash.

364-day T-bill cut-offyield hiked: RBI completed its move of aligning primary market cut-offs for treasury bills with secondary market yields by hiking the 364-day T-bill cut-off to 10.75 per cent. The notified amounts for all the three types of treasury bills have also been hiked: 14-day and 91-day to Rs 500 crore and 364-day to Rs 400 crore. This move should widen the treasury bill market and help increase secondary market volumes. RBI had a couple of December maturity treasury bills on its OMO sale window.

Interestingly, RBI has been revising the price every day. The OMO list has been expanded to four bills maturing in December (9.57 per cent), April (10.21 per cent) July (10.44 per cent) and September (10.67 per cent) defining the floor for the below one-year yield curve.

US-64 fears hit bond prices: With reports of US-64 NAV being significantly below its current sale and repurchase prices, the market was agog with rumours of redemption pressure and UTI selling government securities to meet repurchase demand.Though any large-scale sale by UTI remain unconfirmed (and no large deals reported in SGL trade reports), many market players panicked and sold securities on Thursday. As a result, yields shot-up: three-year yields shot up to 11.74 per cent and ten-year to 12.30 per cent. However, the market rebounded on Friday with yields of short and medium-term securities recovering to earlier levels. Currently, two-year securities are quoting around 11.43 per cent, three-year around 11.63 per cent and ten-year around 12.30 per cent.

Yield curve remains flat: The differential in yields between two-year and three-year securities is currently around 22 basis points, and the differential between three- and ten-year around 68 basis points. The net outflow from the system in the week is estimated to be about Rs 3,500 crore much below the repo outstanding position. Given the flat shape of the curve, we recommend overweighing the short-end despite the comfortable liquidity position.

12.50% SDL may beoversubscribed: The second (and possibly the last) tranche of state development loan (SDL) issue is scheduled for Monday. Given the 20 basis points spreads offered above the secondary market level of ten-year government of India securities, the issue is likely to be oversubscribed. Corporate paper: The activity in commercial paper market has improved sharply. However, with call rates at 8 per cent and three-month T-bill trading near 9.9 per cent, yields are unlikely to ease from the current levels: 10.25 per cent for one-month, 11 per cent for two-month and 11.4 per cent for three-month P1+ rated CPs. The financial institution paper market was dull with activity concentrated in one-year paper. One-year paper is currently quoting around 12.6 per cent yield.

( For the week ending October15)