Auction cut-off below market expectations

The Reserve Bank of India (RBI) today set a cut-off yield of 7.38 per cent (Rs 100.60) at the auction of 7.46 per cent government bond maturing in 2017, which was below market expectations.

It also set a cut-off yield of 7,63 per cent (Rs 97.27) at the auction of 7.40 percent 2035 government bond, which also was lower than market expectations.

The auctions, expected to raise Rs 6,000 crore, are part of the government's scheduled market borrowing programme for the fiscal year ending in March.

The yields on government securities continued to harden amid the auction as investors coped with tight money market liquidity conditions. Traders are maintaining a bearish outlook as cash surpluses are low.

The yield on the actively traded 8.07 percent 2014 government stock rose to 7.3512 per cent against its previous close of 7.32 per cent.

The borrowing programme, comes on the back of dwindling cash surpluses, which has tightened liquidity further. The liquidity is expected to shrink further owing to auction outflows.

Even today, RBI received a mere Rs 70 crore through the reverse repo auction even as it infused Rs 14,825 crore today.

Over the last one week, call- rates at which commercial banks borrow daily to tide over their temporary liquidity mismatches - has been hovering around a three-year high of 7.20 per cent, almost one percentage point higher than the Reserve Bank of India's (RBI's) repo rate.

The RBI, on an average, has been pumping in over Rs 20,000 crore daily into the financial system through its repo window.

In the mid-term review of the policy in October last year, Reddy hiked the repo rate and reverse repo rate by a quarter percentage point each to 6.25 per cent and 5.25 per cent, respectively, but left the bank rate unchanged at its three-decade low level of 6 per cent.