Call likely to track reverse repo, rupee seen gaining

Call rates traded flat around the reverse repo rate throughout the week to close at 5.50-5.60%. On account of increased supplies by way of interest and redemption payments, cash surpluses with the banking system remained robust.

Thus, demand for funds that are customarily high at the start of every new reporting cycle so as to meet the cash reserve targets was low.

The amount placed under the reverse repos averaged at Rs 64,267 crore as against Rs 63,368 crore in the previous week, while no bids were received at the repo auction.

Amid surplus cash reserves, call rates are likely to trade soft around the reverse repo levels. The upcoming gilt auction outflows are unlikely to dent money market liquidity.

Gilts

Gilts traded subdued throughout out the week on account of various factors. Gilt yields rose 6 bps over the week on concerns that short-term rates would move up due to shrinking rupee liquidity.

Apprehensions over domestic fuel price hike hurt the sentiment. GDP for the quarter ended March ’06 rose to 9.3% compared with 8.6% a year ago, and the GDP for FY06 was revised to 8.4% from 8.1% earlier. Moreover, fresh gilt auction in a subdued market and hawkish statements in the FOMC minutes added to the woes.

The government is set to auction the 9.39% 2011 paper for Rs 6,000 crore via a price-based auction using the multiple price method and a 30-year paper for Rs 4,000 crore through a yield-based auction using the uniform price method.

All these factors made the rate hike by the RBI in its forthcoming policy review look more likely. However, towards the end, recovery in rupee helped restrict losses. A rise in the inflation rate (4.74% from 4.32% previously) failed to have any major impact on the market.

The yield on 7.59% 2106 closed at 7.67% after hitting an intra-week high of 7.68%, from 7.61% previously. Fresh gilt issue for Rs 10,000 crore slated for June 6 is likely to keep activity in gilts low. Higher-than-expected price hike in domestic fuel prices is expected to mar sentiment.

Corporate bonds

Corporate bond yields rose over the week as expectation of a hike in domestic fuel prices and announcement of a fresh bond auction loomed over the market. Yields at the short end rose sharply as investors braced for domestic fuel price hike and near-term liquidity condition. Yields were steady initially, but edged up gradually as the sentiment turned bearish.

The AAA 5-year benchmark yield inched up to 8.27% from 8.25% while its spread over underlying risk-free yield narrowed to 86 bps from 94 bps previously. Bond yields may inch up on expectation of local fuel prices hike and scheduled GoI bond auction.

Forex

The rupee closed nearly flat at 45.91 per $ from 45.89 per $ last week. The sentiment improved after a rebound in domestic stock indices reinforced expectation of FII inflows.

The unit was fairly volatile and suffered huge losses in the first half as combination of rising FII outflows from the domestic stock indices and month-end dollar demand from importers weighed heavily on the market.

Sebi data showed that FIIs sold local shares worth $324.3m over the week, dragging the rupee to a 3-year low of 46.50.

However, the rupee recovered smartly as stocks bounced back later in the week and the dollar lost ground against majors following weak US economic data. Six-month annualised premium ended at 0.68% from 0.46% last week. Levels were extremely choppy over the week due to the volatility in the spot market.

The rupee is expected to extend Friday’s recovery as the dollar lost ground against the majors following weak payrolls data.

Credence Analytics India Ltd