Call rates likely to stay between 6.50% and 7.00%

Liquidity conditions remained tight as banks continued to borrow large amounts from the Reserve Bank of India’s repo window. It was as high as Rs 1.18 lakh crore on November 9, the first week of the current reporting fortnight. Borrowings from the Reserve Bank of India’s repo window have been tapering off in the past few days because banks’ reserve requirements eased as they were maintaining higher balance by borrowing more at the beginning of the fortnight. However, liquidity is likely to remain tight and call is expected to hover between 6.50% and 7% this week.

The benchmark 10-year bond yield ended at 8.03%, up from 8% witnessed in early trades on Friday. Bonds weakened slightly after the China reserve ratio hike announcement. Yields are likely to remain near around 8% as the absence of fresh bond auction in the coming week and hopes that the enhanced foreign investment limit in Indian debt will be auctioned soon. Hopes of cash-easing steps resurfaced after RBI official’s comment, and the government’s extra spending plans may support bonds.

Food inflation declined further coming close to the much-awaited single-digit mark largely because of an increase in supplies of kharif crops and cheaper cereals and pulses. Food inflation dropped by two points to record a three-month low of 10.3% for the week ended November 6. In the previous week, food inflation was at 12.3%. The annual rate of inflation was recorded at 13.30% for the latest week compared with 14.87% a week earlier. Though decline in inflation is widely expected, further falls may give room to pause monetary tightening.

The yield on the three-month CD was higher at 8.10% and that of six months at 8.60%, given the tight conditions in the market. This week, we expect CDs to trade in the range.
3 months — 8.05-8.10%
6 months — 8.55-8.65%
1 year — 8.85-9%