CRR hike takes a toll on liquidity, Re drops

MONEY MARKET ROUND-UP

Liquidity in the market suddenly came down from surplus levels seen on Monday. Since the RBI hiked cash reserve ratio by 50 basis points in one tranche with effect from November 10, banks were cautious with liquidity. The move might drain out around Rs 7,000-8,000 crore from the banking system, said a dealer.

With auctions of dated securities and treasury bills lined up for government borrowing and market stabilisation scheme (MSS) and foreign exchange inflows taking backseat for a while, the market is cautious about surplus liquidity. Therefore, the RBI could mop up only around Rs 4,000 crore from the market.

While call rates, at which banks lend and borrow from each other for intraday fund management, fell to 4 per cent, CBLO witnessed high rates at 5.5 per cent. Dealers explained that while the banks could borrow from call markets, non-banking players flocked to the collateralised lending and borrowing market for remaining liquid.

G-sec: Yields rise by 6 basis points
The hike in CRR pushed up yields on government securities by 5-6 basis points following selling pressure in the market. Prices of government papers fell by 15-20 paise across maturities and the yield on the ten-year benchmark paper closed higher at 7.86 per cent as against 7.81 per cent on Monday.

The yield on the one-year t-bill also rose to a high of 7.50 per cent as against 7.41 per cent. Dealers expect the cut-off yield on the 91-day and 364-day t-bills to shoot up on Wednesday. The 91-day t- bill is likely to fetch a cut-off yield of 7.25/7.30 per cent as against 7.10 per cent last week.

OIS and corporate bonds: Dull trade
There was a lacklustre movement in the overnight interest rate swap (OIS) market. Since the rates in the underlying government security have gone up, the sentiment in the OIS market was also bearish.

Dealers paid fixed interest rates in the deals struck, anticipating a further firming up of yields. The OIS market is a derivative product based on the underlying of the interest rate on government securities.

Apprehending a rise in liquidity in the short term, which could push up the rates as well, the market witnessed a lot of deals in the one-year benchmark segment.

Volumes in the one-year segment clocked around Rs 20,000 crore, while rates in this category went up to 7.14 per cent as against 7.01 per cent on Monday. Similarly, in the five-year maturity, rates went up to 7.22 per cent as against 7.18 per cent.

Yields of corporate bonds went up across maturities tracking the bearishness in government securities. There was no primary issuance either in the short term or the long term since all issuers were waiting for cues from the credit policy on Tuesday and the Federal Reserve's meeting on Wednesday.

In short-term instruments, the five-month CD of State Bank of India witnessed yields moving up from 7.30 per cent to 7.42 per cent, while in the nine-month category, yields in CDs of State Bank of Hyderabad moved up from 8.10 per cent to 8.29 per cent. In the one-year segment, CDs of Union Bank of India and Canara Bank were traded at 8.45 per cent as against 8.30 per cent yesterday.

Forex: Closes low
The spot rupee remained rangebound by opening at 39.42/43 to a dollar backed by corporate flows. The currency went up to a high of 39.33 before bouncing back to a low of 39.40 to end the day.

The annualised premia for the six-month and one-year maturities shot up to 1.43 per cent and 1.25 per cent as against 1.17 per cent and 1.13 per cent respectively.

According to dealers, this reflected a widening of interest rate differential between India and the US since RBI hiked the CRR by 50 bps and the Federal Reserve is likely to cut the Fed rate.

Global markets: Dollar weaker
Major currencies such as the euro and pound continued to gain against the dollar except for the yen. The pound and euro traded at $2.0658 ($2.0606) and $1.4395 ($1.4300) respectively. The yen lost to the dollar and traded at $114.80 ($114.70).