Average call money rate during the past week was above 11 per cent, primarily due to the announcement of the Rs 5,000-crore auction on Monday. The announcement caught the market by surprise as most participants expected the Reserve Bank of India to adopt the private placement route at this stage.

Inflows from redemptions and coupon receipts during the reporting fortnight September 25-October 8 added up to Rs 6,000 crore, while outflow totalled Rs 8,000 crore. Expected inflows during the next reporting fortnight is less than Rs 3,000 crore, which indicates call rates above 10 per cent this week.

Rupee strengthens on election outcome

It was a good week for the rupee. Both the spot and the six-month forward appreciated significantly. Spot rupee appreciated from 43.59 against the dollar on Monday to 43.42 on Friday while forwards softened from 5.78 per cent to 5.35 per cent during this period.

The near-term outlook on the rupee is positive. Withindications of stability on the political front, chances of forex inflows have improved significantly. Over the medium term this may also inject liquidity in the banking system.

T-bills continue to devolve

Bidding interest in treasury bill auctions was affected by shortened tightness. The 364-day and the 91-day cut-offs remained unchanged at 10.35 per cent and 9.48 per cent respectively, while the 14-day bill cut off 26 basis points higher at 8.63 per cent. The 91-day bill devolved completely, while Rs 390 crore and Rs 75 crore devolved in the 364-day and 14-day bill auctions, respectively.

Rs 5,000-crore auction fully subscribed

The 11.90 per cent 2007 and the 12.60 per cent 2018 securities were re-issued for notified amounts of Rs 3,000 crore and Rs 2,000 crore, respectively, on October 7. The 11.90 per cent 2007 auction received bids for Rs 4,272.21 crore, cutting off at Rs 102.71 (11.35 per cent), 15-20 paise below secondary market levels. The 12.60 per cent 2018 auction receivedbids for Rs 3,455 crore, cutting off at Rs 104.05 (12.05 per cent), 35 paise lower than last dealt secondary levels.

The impact on market liquidity has been less adverse than previously expected. Call rates on Saturday opened at 12.70 per cent but declined steadily to close near 11.75 per cent levels. The market was fairly bullish. Most trading portfolios had lightened their positions ahead of the auction on Thursday, while large nationalised banks slowed down on buying.

Subscription interest at the auction was better than expected with the distribution being fairly wide. Trading interest has once again returned to the market, pushing up long-dated security prices by 13-16 paise from post auction levels. With no upheavals expected in the near term, the underlying bullishness in the market resurfaced.

We expect markets to remain fairly bullish ahead of the credit policy which will be announced on October 29. Another auction in the interregnum will not be a significant dampener. We, therefore, recommendincreased weights at the medium-to-long end of the yield curve. With call rates not expected to decline below 9.5- 10 per cent, appreciation at the short-end would be limited.

Corporate Paper

The commercial paper yield curve continued flat between 10.30-10.50 per cent for maturities between one and three months. With short-term rates expected to remain fairly tight over the next week, we do not expect any increase in secondary interest.

High quality corporate paper continues to face increased demand on the back of mutual fund demand. TISCO (AA+) raised Rs 150 crore at 12.60 per cent coupon for equal redemptions in six, seven and eight years. The corresponding FI paper yield would be in the region of 12.50 per cent.

Demand for FI paper is relatively low, primarily on account of limit restrictions across investors. Further, primary supply of FI paper is expected to continue over the next couple of months.

(For the week ending October 16, 1999)