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Call rates are expected to tighten: Liquidity continued to be comfortable despite the Rs 1,500-crore outflow on account of the three-year security issuance. Call rates stayed in the 8-8.10 per cent range throughout last week. However, the short-term liquidity outlook has tightened. The amount outstanding in repos declined to Rs 421 crore on Saturday, while gross inflows of close to Rs 590 crore and advance tax outflows approximating Rs 5,500 crore are expected this week. Call rates are expected to trade in the 8.2-8.5 per cent band this week.
Rupee stays rangebound: The rupee was stable throughout the week in the 42.56/58 range against the dollar. The overall economic scenario shows no signs of recovery, and the finance minister has finally admitted to the possibility of fiscal slippage. The IIP grew at 2 per cent YoY in October (a growth of 3.6 per cent in the first seven months of this fiscal over the corresponding period last year). The slow economic growth as well as a widening currentaccount deficit will eventually push the rupee downwards. However, we do not expect any sharp depreciation in the near term, and expect the rupee to trade near current levels this week.
Treasury bill yields reflect tighter liquidity: The 91-day treasury bill cut-off yield -- 8 basis points higher at 9.48 per cent -- reflects tighter short-term liquidity conditions. The total amount bid was Rs 415 crore, very close to the notified amount. The 14-day cut-off yield remained at 8.37 per cent.
Three-year auction gets overwhelming response: The Rs 1,500-crore three year security auction held last Monday attracted 153 bids for Rs 6,368 crore. The cut-off yield at 11.47 per cent was significantly lower than the initial expectations.
Bonds surge initially, later lose all gains: With the auction getting subscribed at a lower-than-expected cut-off, two-three year securities surged, gaining about 10 paise. However, the rally was short lived owing to profit-booking and expectation of taxoutflows. Prices have since stabilised near pre-auction levels.
Barbell window open in four-six year securities: The yield of differential between the 11.78 per cent 2003 security and the 12.59 per cent 2004 security has widened to 19 basis points. A barbell strategy of replacing the 11.78 per cent 2003 with a combination of 11.68 per cent 2002 and the 12.50 per cent 2004 provides a yield pick-up of 7 basis points without any change in the modified duration of the portfolio. The large sales of the 11.78 per cent 2003 security at the OMO window indicate that there are buyers for this security at this yield and the strategy can be executed in practice.
The spread between one-year treasury bills and two-year bonds, which widened in the previous week, has not yet narrowed. At current levels, two-three year securities appear more attractive than the one-year segment. Trading volumes beyond three years is limited to the OMO window. We continue to recommend the portfolio concentration in the two-threeyear segments.
Corporate paper: The short-term corporate yield curve flattened as three month P1+ primary rates fell 10-15 basis points to 10.5 per cent levels, while the one-two month secondary levels remained at 9.75-10 per cent and 10.1-10.25 per cent, respectively.
With short-term liquidity expected to tighten slightly, we do not expect yields to decline any further.
The primary F1 yield curve continues to determine secondary levels. One year is at 12.5 per cent, two years at 13.25 per cent, three years at 13.5 per cent, five years at 14 per cent and ten years is at 14.5 per cent. In the secondary market, AAA corporate paper is being bid at lower yields than comparable F1 paper reflecting the lack of good quality corporate issuances.(For the week ended December 12)
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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