Call down 40 bps, yields at 7-mth low

Rates on the inter-bank call money market fell by nearly 40 basis points on account of improved liquidity, boosted by the redemption of a floating-rate bond worth Rs 2,100 crore. Call rates ended the day in a range of 6.25-6.35% compared to Tuesday’s closing levels of 6.65-6.75%.

RBI mopped up bids worth Rs 160 crore, under reverse repo operations in the morning session of liquidity adjustment. However, in its afternoon session, RBI absorbed bids worth Rs 23,560 crore under the SLAF. Buoyed by a sharp rise in surplus liquidity and also drawing support from a softening in crude prices, bond yields ended at a seven-month low. The yield on the benchmark 7.59% 2016 bond closed the day at 7.46%, down from Tuesday’s close of 7.48%.

This is the lowest level that the paper has seen since April 28, ‘06. The sentiment was also bolstered by gains in US treasuries, following expectations that the Federal Reserve could cut rates in coming months. Players anticipate the sharp surge in surplus liquidity could ensure that the scheduled auction of gilts worth Rs 5,000 crore would be smooth-sailing on Friday.

Treasury officials see the yield curve could raise once again on the back of growing cash surpluses, which could see yields on shorter dated paper falling in the next few weeks. The spread between the 10-year bond yield and the one-year federal bond yield narrowed to 45 basis points on Wednesday from 67 basis points a week earlier and 55 basis points at the start of the month.