Rupee gains 5 paise: With most world markets closed for the year-end break, volumes in the forex market were thin. The rupee gained about 5 paise and ended the week at 42.48 a dollar. The rupee is expected to stay in the 42.45-42.55 range throughout the week.

Full subscription in treasury bills: The 14- and 91-day treasury bills were fully subscribed. The 364-day treasury bill attracted significant response, and the cut-off at 10.50 per cent was 3 basis points below the previous auction.

State developmentloans oversubscribed: The SDL issue of states aggregating Rs Rs 1,612 crore received bids for Rs 2,812 crore. The oversubscription was refunded. With this, the gross market borrowing of the states has totalled Rs 11,198 crore this fiscal.

No upside at the long end: Liquidity is likely to improve over the next month with redemption of Rs 3,000 crore on January 18 and Rs 2,000 crore on February 7. However, most of the inflows are expected to be absorbed by OMO sales, and to be re-invested in the short and medium maturities. The yield curve in the 7-10 year segment is unlikely to shift significantly.

The barbell arbitrage in the four, five and six year securities described in our last coupled of issues continues to exist, and holders of the 11.78 per cent 2003 security can avail of this opportunity. Our preference continues to be in short-term securities.

Small-savings mopup reported to be large: Collections through the small-savings schemes has been reported to have crossed Rs 33,000 crore in the firstnine months, against the full year target of Rs 21,640 crore. Last year, too, the collection at Rs 24,478 crore was much higher than the targeted Rs 14,000 crore, While interest rates have fallen for most other investment options over the last two years, the interest rates offered on these were not revised. As a result, the relative attraction of small savings had increased.

Whereas the higher collection does relieve pressure on the government's market borrowings under the current fiscal slippage scenario, the average cost of borrowing is much higher. Interest rates have been cut for most schemes by 50-100 basis points.

Even after the rate cut, these remain attractive and some schemes provide yields compoarable with those of financial institution bonds. The interest on PPF has been left unchanged at 12 per cent tax-free.

Trade deficit widens further: Trade deficit in the first eight months of this fiscal has widened to $6.7 billion from $3.4 billion in the corresponding period last fiscal. Exports at$21.48 billion have declined by 4 per cent during this period. Non-oil imports have grown at 18.7 per cent over this period, with the highest growth in bullion and food items. The saving grace has been the lower international prices of POL products, resulting in a 25 per cent decline in the oil import bill.

While the foreign currency reserves are currently at an all-time high, it should be noted that a large part of the inflows this year have been on account of Resurgent India Bonds. Unless there is a turnaround in export performance, the external account could come under pressure over the next couple of years.

(For the week ending January 9)