"Since the second fortnight of June 1998, the upward movement in interest rates across the maturity spectrum was witnessed due to strengthening of interest rates... The yield spread between 10-year stock and 364-day treasury bills declined from 403 basis in May 1998 to 267 basis points in September 1998," says the Reserve Bank of India in its Current and Finance Report, 1997-98.

In the first quarter of 1998-99 (up to September 1998), yields on three- to ten-year stock quoted between 11.10 per cent and 12.25 per cent. The cut-off yeild on the 10-year paper had plunged to 12 per cent on May 2 while on the six-year paper, it stood at 11.50 per cent on May 9.

Net sales of government securities under OMO amounted toRs 9,053 crore during 1998-99. During 1997-98, net sales of securities under OMO amounted to Rs 7,614 crore. Net sale of government securities was significantly higher at Rs 5,551 crore during the second half of 1998-99 against Rs 2,063 crore during the first half of 1997-98.

The primary market yield curve witnessed wide fluctuations during 1997-98 on account of a steep decline in interest rates in the second quarter of the financial year owing to a low inflation rate and easy liquidity conditions. Yields emerging in primary auctions during the year ranged between 10.85 per cent and 13.05 per cent for three- to ten-year maturities with a weighted average yield of 12.01 per cent against 13.40 per cent to 13.85 per cent for two- to ten-year maturities with a weighted average of 13.69 per cent during 1996-97. The coupon rate on the longest maturity stock drifted downward to 13.05 per cent at the beginning and 12.15 per cent by the close of the financial year.

During 1997-98, the aggregate borrowing ofcentral and state governments amounted to Rs 67,386 crore through dated stock and 364-day treasury bills against Rs 42,688 crore during the previous year. The central government mobilised Rs 43,390 crore through dated stocks and Rs 16,247 crore through 364-day treasury bills. The major part of the borrowing programme was completed during the first half of the financial year on account of easy liquidity conditions and low credit offtake.

The central government also raised Rs 704.5 crore through capital indexed bonds and privately placed Rs 11,000 crore with the RBI. On account of large private placements, the total subscription of the RBI amounted to 30 per cent and the devolvement on primary dealers was 4.4 per cent of the total issue of dated securities against 13.2 per cent and 1.3 per cent during 1996-97.

During 1997-98, gross 14-day treasury bills auction amounted to Rs 69,237 crore. Easy liquidity conditions up to November 1997 evoked favourable response from the market. As rates hardened, the amountoutstanding sharply declined from Rs 10,625 crore in mid-September to Rs 240 crore by end-March. However, upward pressure on the cut-off yield saw the implicit yield rise to 7.04 per cent in December 1997 from 4.95 per cent in November 1997.