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I-Sec report
(For the week ending November 7)
Calls likely to drift lower: Call rates averaged 9 per cent last week, declining to 8.75 per cent towards the end as liquidity improved. With Rs 4,320 crore outstanding in repos, we expect call rates to settle between 8.25 per cent and 8.75 per cent this week.
Rupee stays range-bound: The rupee was strong during the beginning of the week at 42.25 against the dollar. The last two days of the week, however, saw the rupee lose about 10 paise. We expect the rupee to remain rangebound, with no significant pressure on the external front.
91-day cut-off marginally lower: The notified amount for the 91-day treasury bills auction was lowered from Rs 500 crore to Rs 200 crore. The auction cut-off at 10.30 per cent was slightly lower than the previous cut-off at 10.07 per cent.
Mid-year review leaves reference rates unchanged: As expected, the Reserve Bank of India left the repo rate, CRR and bank rate unchanged. The credit policy mentioned thatmonetary growth at 20 per cent-plus as well as inflation above 8 per cent were areas of concern, a tighter monetary stance was not warranted at this stage. Increase in primary article prices, caused by floods and late rains in certain parts of the country, have been the significant contributor to high inflation.
The secondary sectors continue to bear the brunt of the overall economic slowdown and manufacturers have been unable to effect any significant price hikes. Further, tight money measures would therefore have stifled corporate investment, while not addressing the primary cause of high inflation.
With corporate demand expected to pick up in the busy season, stable interest rates would be key to supporting an economic revival.
The argument for lowering short-term rates has to be examined against the continuing concern on the external front. With banking sector liquidity not constrained, and most of the sovereign borrowing programme completed, the current short-term stance need not be unwound. Thisalso leaves the option to ease, particularly CRR, as and when corporate demand picks up.
Government security auction likely this week: About Rs 9,000 crore of the planned borrowing programme through dated securities is to be completed (assuming about Rs 4,000 crore will be issued through 364-day treasury bills in the remaining part of the fiscal). With the busy season kicking off credit offtake, the Reserve Bank would prefer to complete this as early as possible to avoid any pre-emption of credit to the production sectors.
We expect a dated security auction announcement this week. The yield curve is flattish and we expect the tenor to be in the five to seven year bucket.
Overweigh the short end: The net inflow into the banking system this week is estimated at Rs 700 crore without taking into account the likely government security auction. The credit policy has not given any cause for cheer in the short run. With the repo keeping a floor on the call rates, any easing of rates isunlikely.
The longer end could come under an upward pressure if a long-maturity auction is held. There appears to be no upside for moving into the longer term securities. We would continue to remain concentrated at the short-end. The market has been illiquid beyond the three-year maturity during the last week. The YTMs in the table indicate our estimate of current bidding levels.
Corporate paper: With primary issuances in commercial papers having declined, there was increased interest in the secondary market. Yields declined by about 10 basis points for P+ paper. There was some interest in financial institution paper also, especially in the one-year segment. Some deals were reported in the five-year segment also. We do not expect any significant change in yields.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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