Call rates ease below 8 per cent

With the rupee spot and forwards stabilising, and banks overcovered on their reserve requirements, call rates dipped marginally below 8 per cent in the last few of days of the Reporting Fortnight. Expected inflow in excess of Rs 3,000 crore this week have been balanced by the private placement-cum-on-tap sales announced on Thursday. Liquidity is expected to remain comfortable this week too, and call rates are expected to remain in the 8 per to 8.5 per cent range. This forecast, is of course, under the assumption that there is no escalation in the border situation.

Private placement-cum-on tap sale

Rs5,000 crore was privately placed with the RBI late on June 3, completing 45 per cent of the budgeted borrowing programme. The 11.98 per cent 2004 and 11.99 per cent 2009 securities were reissued at Rs 102.85 and Rs 101.40 totaling Rs 3,000 crore and Rs 2,000 crore, respectively. The effective yield at 11.24 per cent for 11.98 per cent 2004 was lower than traded levels (11.30 per cent), while the effective yield for 11.99 per cent 2009 at 11.74 per cent was higher than market levels at 11.70 per cent.

On being put on RBI's OMO sale window the next day, the ten-year stock was exhausted within a short period. The market price of 11.98 per cent 2004 appreciated by 10-12 paise, settling near 11.27 per cent.

Improved participation at T-bill auctions

The 14-day T-bill auction cut-off was pegged lower at 8.37 per cent, down from 8.63 per cent previously. There were 21 competitive bids totalling Rs 359 crore and there was no development. The 91-day-cut-off was pushed up to 8.81 per cent from 8.77 percent. There were 15 competitive bids for Rs 125 crore, however, Rs 6.5 crore devolved on RBI.

Comforting news on the macro front

Indirect tax collections in May '99 are up 18.5 per cent on a year-on-year basis. Both the major components, excise and customs have increased by 22.5 per cent and 15.3 per cent, respectively. Increased non-food credit offtake (adjusted for the seasonal slack observed during this period) from banks indicates improved demand from the corporate sector. With other important macro variables -- cement prices, petrochemical prices -- showing signs of consolidation, fiscal strange are expected to be less. With 45 per cent of the budgeted borrowing programme having been completed and inflation not yet a concern, this is good news for bond markets.

Bullishness back at the long end

As call rates settled near 8 per cent, short-end securitity yields finally moved down by 5-7 basis points. The indicative yields for the Rs 5,000 crore private placement and subsequent OMOsales seem to establish that RBI is aiming to steepen the yield curve by lowering medium-end rates. Market appetite for long-end paper picked-up as OMO sales during the past week exceeded Rs 2,600 crore (Rs 2,000 crore of 11.99 per cent 2009). With border tensions not worsening any further and supported by a relatively steady rupee, overall market sentiment is once again bullish. As long as combination of call money market and refinance facilities are used to fund long-dated securities, short-term rates are not expected to decline in any significant manner. Trading interest would therefore continue at the longer end, unless the external situation deteriorates.

Corporate Paper

With call rates having declined at the short end commercial paper (CP) market has become active. Three-month rates are once again in the 9.90 per cent-10 per cent band. June-end CPs are also being transacted at 9.5 per cent levels targeting quarter-end demand for liquidity.

With certain amount of bullishness emerging on theexternal front, there has been demand for institutional long bonds from traders. Five and seven-year maturities have dealt at 12.85 per cent and 13.10 per cent, respectively.(For the week ending June 12, 1999)