Call rates seen trading soft, Re may touch 40.50-mark
Supported by robust systemic liquidity, call money rates fell to their seven month lows of 0.05-0.70% from previous week’s closing level of 7.75-8%.
Supported by robust systemic liquidity, call money rates fell to their seven month lows of 0.05-0.70% from previous week’s closing level of 7.75-8%. Marked improvement in cash supplies largely boosted by inflows by way of bond redemptions and perceived intervention by RBI to curb rising rupee helped call rates trade easy.
The amount placed under the reverse repo averaged to Rs 50,802 crore, substantially higher from last week’s average of Rs 149 crore. No bids were received at the repo auction during the week. Regular fortnightly funds demand coupled with twin auctions worth Rs 9,000 crore scheduled for June 5 are likely to keep the borrowings high. However, viewing the current liquidity conditions, call rates are expected to trade soft.
Gilts Market
On the confluence of various favourable factors, gilt prices finished the week with gains. Gilts prices rose as banks incessant demand for SLR and views that key interest rates would be held steady with easing inflation aided market momentum.
More so, flooded by the sudden liquidity as call rates plunged to below 1%, and in the absence of any liquidity-absorbing instrument like market stabilisation bonds, yields dipped further. Traders also stepped up purchases for their SLR purposes in an attempt to replace 11.90% 2007 paper, which matured during the week.
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However, consolidation following the sharp run-up owing to profit booking at higher levels capped major gains. Concerns that given the robust rise in systemic liquidity, RBI may once again press the CRR button kept the underlying sentiment cautious. The yield on the 10-year benchmark paper eased four bps over the week to close at 8.08% from 8.13% previously. As per the borrowing schedule, RBI would auction 7.49% GOI 2017 paper for Rs 6,000 crore and 8.33% GOI 2036 paper for Rs 3,000 crore.
Given the central bank’s policy stance, which emphasised on keeping liquidity on a tighter leash, market participants are largely expecting another round of measures to curb the rising cash flows. Gilt yields are expected to trade in a range.
Corporate Bonds
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Longer-tenor papers evinced marginal interest throughout the week despite a surge in liquidity caused. Traders refrained from taking positions in medium and long-tenor papers, as they perceived the liquidity to be short lived.Shorter-tenor papers continued to be actively traded with yields edging down by nearly 35-50 bps. The rally in gilts did not rub off on medium and longer tenor corporate paper with yields remaining fairly stable throughout the week.AAA 5-year yield moved from 10.05% to 10%. The credit spread registered a jump to 191 bps from 178 bps. Yields may edge up as surplus liquidity ceases to exist ahead of MSS auction and twin GOI bond auction even as players brace themselves up for advance tax outflows in June.
Commercial Paper
With call rates touching historical lows amidst surplus liquidity, the primary market witnessed tremendous activity. Mutual funds showed great interest in the CD issuances from banks which outweighed the CP issuances. Reference rate for a P1 plus rate CP fell to 8.80% from 9.65%. At the 91-day T-Bill auction, the RBI set the cut-off price at Rs 98.19 (yield: 7.39%) from Rs 98.13 (yield: 7.64%) last week while the 182-day cut-off price was at Rs 96.34 (7.62%) from Rs 96.28 (7.75%) previously.
Forex
Rupee remained volatile throughout the week and closed at 40.53/$. Earlier, rupee strengthened past 40.50/$ and soared to a fresh 9-year high of 40.28/$, bolstered by expectations of huge equity-related inflows. Hampered by strong month-end corporate demand and suspected dollar buying by PSU banks the rupee fell to 40.85/$ mid-week before recovering swiftly. Robust GDP data supported the unit to hang around its 9-year high.
Forward premia dropped sharply in the week as the rallying rupee prompted receiving. Six-month and 12-month forward premia closed at 2.58% and 2.73%, respectively. Rupee may once again break 40.50/$ on expectations that inflows will continue to hit the local equity markets. Movements of PSU banks will be keenly observed.
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Credence Analytics India Pvt Ltd
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