Bonds: Call rate to stay steady at 8.5%

Moses Harding
Head, Alco and Economic Research

The dollar liquidity squeeze and the resultant shift of credit demand from dollars to rupees and higher market borrowing by government pushed the draw down from RBI's repo counter to over Rs 1 trillion. There's the risk of additional LAF counter at 9.5% when advance tax outflows hit the system in mid-December.

RBI is likely to use all options to prevent pressure on money market rates. There is chance of improvement in availability of dollar liquidity from off-shore market and rupee liquidity by RBI.

While call money rate may be steady around 8.5% till January '12 and to 8% thereafter, 6-12 month rates are expected to ease to 8.75-9.25%. Bond yields have factored in these expectations; hence stability in one-year bond yield at 8.10-8.35% and 10-year bond yield at 8.50-8.75% will be in order.