Rupee jitters, then settles down: The rupee was weak on Monday and touched a low of 42.62 a dollar on the back of corporate demand for dollars. However, pressure on the rupee eased later and the currency ended the week at 42.55. The data releases on the trade and capital flows continue to be discouraging. Trade deficit in the first seven months of this fiscal was $5.8 billion compared with $2.7 billion in the corresponding period last year. Foreign direct investment inflow has been $1.3 billion during this period, and the full year inflow is likely to be much lower than the $3.2 billion infiscal 1998.

364-day treasury bill cuts off at 10.54%: Good liquidity resulted in aggressive bidding in 364-day treasury bill auction. The cut-off yield at 10.54 per cent was 11 basis points lower than the previous auction. The cut-off yield declined by 17 basis points to 9.40 per cent for the 91-day treasury bill.

Borrowing programme target breached: With the private placement of the Rs 2,000-crore 10-year paper, and the announcement of a three-year auction, the gross borrowing programme has exceeded the budgeted figure. With this auction, the gross borrowing stands at Rs 80,452 crore (budgeted Rs 79,376 crore).

Liquidity to tighten this reporting fortnight: The total amount outstanding in repos on the reporting Friday was Rs 4,939 crore, and the net outflow during this week is estimated to be about Rs 600 crore. However, the advance tax outflows due next week would result in tighter liquidity.

Two-three year securities appear the best bet: Currently, one-year treasurybills are trading close to 10.43 per cent. The zero coupon bond maturing on February 3, 2000, offers 11.13 per cent money market yield, that is, yield pick-up of 70 basis points for two months additional residual maturity. This suggests a switch from near-one year treasury bills to this security.

The yield differential between one- and two-year securities has also widened by about 20 basis points. Three-year securities currently trade at 11.50 per cent yield. The three-year paper auction on Monday is expected to attract good participation. With repo rate at 8 per cent, the one-year rate is unlikely to ease significantly from the current levels. Trading volumes are expected to be thin beyond three years. Keeping this in mind, we recommend investors to concentrate in the two-three year segment.

Corporate paper: Currently, three-month P1+ CPs are being issued in the 10.75-10.9 per cent range. In the secondary market, the two-month paper is quoting at 10.5 per cent and one month at 10 per cent. Withthe drop in the cut-off yield on 91-day treasury bills, CPs are expected to rally by about 10-15 basis points. Corporate bond yields have dropped to financial institution bond levels. In the recent past, the supply of corporate paper has been low, and mutual funds looking to diversity from F1 paper have been bidding for corporate bonds. Currently, the secondary market yield for four-year maturity AAA bonds (as well as FI bonds) is about 13.85 per cent.