Call rates to trade easy; Re likely to feel the heat
The last week of the fortnightly reporting period saw call rates drop near to their month’s low of 2.25-2.50% from 7.25-7.50% previously with liquidity conditions remaining reasonably good.
By TNN |
The last week of the fortnightly reporting period saw call rates drop near to their month’s low of 2.25-2.50% from 7.25-7.50% previously with liquidity conditions remaining reasonably good.
Banks were flush with funds and consequently liquidity turned in surplus. At the LAF reverse repo, bids averaged to Rs 23,961 crore on a daily basis as against Rs 393 crore previously. Sporadic bids for insignificant amount were seen at the LAF repos.
The cumulative CBLO volumes for the week rose to Rs 1,15,915 crore from Rs 54,656 crore. The overnight weighted average yield was lower at 3.13 as against 7.27 in the previous week. Call rates are expected to trade easy as liquidity is likely to stay comfortable this week.
Gilts Market
In a volatile and auction filled week, gilts prices rubbed out early gains and ended with minor losses. Initially, the optimism induced by improved banking liquidity abated concerns over large issuances and encourage fund flushed banks to take fresh positions.
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The overwhelming response at the auction of 7.55% 2010 bond (under MSS) too buoyed sentiment. Bids over Rs 9,000 crore were received against the notified amount of Rs 2,000 crore, while the cut-off price was set at Rs 98.74 (yield: 8.03%)A rise in US yields after the Fed meet prompted domestic players to liquidate their holdings at higher levels ahead of the twin auctions worth Rs 10,000 crore. The US Federal Reserve held its rates steady at 5.25%, but the Bank of England raised its key interest rate by 25 bps to 5.5%.
While fears of large MSS issuances due to the rising cash surpluses in the banking system added to selling, strong liquidation of holdings surged after a strong IIP data (12.9% y-o-y growth in March) signaled risk of firm interest rates.
Adding to market ambiguities was the lower-than-expected cut-off price at the 2017 bond auction. At the 7.49% 2017 bond auction for Rs 6,000 crore, the cut-off price was set at Rs 96.71 (yield: 8.3118%) and at the 8.33% 2036 bond auction for Rs 4,000 crore the cut-off price set at Rs 94.51 (yield: 8.6399%).
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The yield on the 10-year benchmark 8.07% 2017 slipped to 8.08% before edging up to close at 8.17%, up from its previous week’s close of 8.16% Gilts are expected to be relegated to a range with comfortable cash surpluses offering support at lower levels, while fears over RBI’s move to manage liquidity weighing on sentiment.Corporate Bonds
Concerns over tightening of liquidity due to GOI and MSS bond auctions in the week, release of WPI and industrial production data and FOMC rate meet weighed on sentiments at the start of the week. The markets continued to remain drab through the week despite the ample liquidity and the slight rally in gilts seen earlier in the week which failed to extend to the corporate bonds market.
MFs continued to be the active players in the shorter tenor non-SLR segments on the back of ample cash, though volumes were low. The five-year AAA benchmark yield rose to 10.00% from 9.96%. The credit spread over comparable gilts widened to 172 bps from 165 bps.
Activity in the market is likely to remain subdued ahead of fresh MSS auctions which are likely to impact liquidity despite the large redemption/interest inflows scheduled for the week.
Commercial Paper
Money market instruments rallied aided by burgeoning cash surplus in the banking system. The 3-month CP reference rate dipped from 10.65% to 10.20% on surplus liquidity. The 91-day T-Bills cut-off price was raised to Rs 98.14 (yield: 7.6018%) from Rs 98.12 previously. The 364-day T-Bills cut-off price was lowered to Rs 92.81 (yield: 7.7683%) from Rs 92.83 previously.
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Forex
The rupee remained volatile throughout the week and ended 36 paise lower at 41.22/$. In early part of the week, the currency soared to fresh 9-year high at 40.53/$, buoyed by strong Asian currencies and robust FII inflows. Later, it weakened past the psychological levels of 41/$ and hit an intra-week low of 41.45/$, affected by dollar demand by PSU banks and oil companies.
Apart from dollar’s firm recovery, trade minister’s concern over rising rupee and its affect on the Indian exports also weighed heavily on the local unit. Forward levels continued to slide further as excess cash was seen flooding the banking system amid lower inter-bank call rates. Six-month and 12-month forward premia closed at 4.42% and 3.96%, respectively.
Although strong industrial data supported the rupee at the fag end of the week, comfortable liquidity conditions and regular intervention by state-run banks might keep the rupee under pressure.
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Credence Analytics India Pvt Ltd
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