Rupee suffers a temporary setback: The rupee suffered a temporary setback reportedly on corporate demand and traded down to 42.47 a dollar before recovering to 42.39. Though market sentiment remains tentative with no positive signs on the trade and capital accounts, no significant pressure on the rupee is anticipated this week.

Treasury bill cut-offs increase slightly: A tight call money market resulted in a slight pressure on the 91-day treasury bill cut-off, resulting in a 12 basis point hike. After the previous 364-daycut-off at 10.70 per cent, the secondary market traded down to 10.30 per cent in the following week. The 364-day treasury bill auction cleared at 10.65 per cent.

OMO sales decline as call tightens: With call rates tighter, activity on the OMO front was subdued. Activity resumed only towards the end of the week, mainly in the 11.40 per cent 2000 security. The Reserve Bank of India has hiked the sale price to 100.15, and the remaining stock with the RBI is expected to be below Rs 200 crore.

Further private placement and a 20-year issuance: Rs 2,000 crore of the 12.25 per cent 2008 security was privately placed with the RBI last Friday. The RBI also announced the on-tap issuance of a 20-year security at 12.60 per cent. The paper's long tenor may result in participation from insurance firms and provident funds.

One- to three-year segment remains attractive: Currently one-year money market yields are close to 10.50 per cent and the two-year ones are at 11.31 per cent. With grossinflows of about Rs 2,500 crore, the demand for short-end instruments is likely to be good this week. The upside in one-year and shorter securities is contingent on a repo rate cut driving call rates lower. With the rupee having experienced a minor tremor last week, the likelihood of a repo rate cut in the near future appears to be low. Two-year securities continue to look attractive. Currently, these are trading just below the RBI's OMO sale price. With the RBI's stock of 11.40 per cent 2000 security estimated to have declined below Rs 200 crore, a minor rally is expected once the remaining stock is sold. However, the upside is limited to about 5-10 basis points. Currently, three-year securities trade at 11.50 per cent yields. There is a likely 5 basis point upside. The longer end does not seem attractive in the current context. The 20-year issue may divert some demand from the 10-year segment.

Corporate paper: Corporate paper (CP) yields tightened during the week following tighter call and highertreasury bill yields. Three month P1+ CP yields increased by 50 basis points to 10.75 per cent, before coming down by 15-25 basis points to 10.50-10.60 per cent as call money rates stabilised. Primary three-month issuances have occurred at 10.65-10.70 per cent. No significant change in secondary yields is expected. The bond market was not affected by the call volatility. One-year secondary institutional yields increased by about 5 basis points to 12.25 per cent, mainly because of a pickup in primary activity. Three-year yields are at 13.5 per cent, while five-year paper traded at 14-14.05 per cent.

For the week ending November 28