Rupee strong, call rates ranged, gilts active

RECAP

Call rates hovered around 4.25-4.50 per cent at the inter-bank money market last week on the back of ample liquidity amid poor demand.

Towards the beginning of the week, prices of select bonds at the medium to longer end fell by 8-20 paise on moderate selling in the absence of market-moving factors, dealers said.

Yields on central government bonds moved up after the central bank set a higher cut-off yield at the sale of 10-year loans issued by Maharashtra, dealers said.

On Tuesday, the 10-year state paper, which was auctioned, fetched an unusually high rate of 6 per cent against an yield of 5.11 per cent for a 10-year gilt.

According to market dealers, the state paper was not well bid as 31 bids came in for Rs 303 crore against the notified Rs 300 crore.

Therefore, the cut-off was announced at 6 per cent, while the weighted average worked out at 5.81 per cent, they added.

Dealers further said that usually, either in auctions or on-tap, the spread between gilts and state government stock ranges from 25 basis points to 50 basis points. In this case, it has widened to almost 80 bps.

Moreover in any well bid auction, the weighted average price and cut-off price hover around similar levels, whereas in this case the spread was also very high at around 20 bps.

Following a higher cut-off yield on the Maharashtra paper, the yield on the 10-year benchmark bond edged up to 5.13 per cent from 5.12 per cent. While call rates were rangebound within 4.25-4.50 per cent.

The high cut-off on the state loan became the sole factor for the firming up of the yield till the inflation rate was announced on Friday.

As against expectations of a below 6 per cent inflation rate, the government announced 6.07 per cent rise in wholesale price index.

Prices of maturing gilts government were down 15-20 paise and a further fall in prices is expected which will align the real rate of interest to the inflation figure.

Through the week, the spot rupee opened stronger at 45.425/445 against the dollar and edged up further to 45.42/425 in the absence of central bank intervention and global weakness of dollars.

The rupee has been buoyed by an upbeat economy and the dollar's persistent weakness across currencies.

Dealers remained cautious feeling that even though steady portfolio flows are likely to give a fillip to the rupee, its gains are likely to be limited on expectation of central bank intervention.

Forwards are likely to march further north on improved supplies and a stronger rupee. In the middle of the week, the rupee appreciation was halted on recent revival of dollar overseas.

Forwards edged up sharply on improved supplies and as banks swapped surplus dollars for higher yielding rupees. Despite robust inflows and an upbeat economic outlook, the rupee was rangebound on Thursday.

Towards the end of the week. the rupee ended firmer against the dollar on inflows from foreign funds and exporter trade remittances.

Apparently, banks bought dollars as demand waned later in the day. The rupee dipped earlier during the day on moderate dollar demand from corporates and as state banks capped the currency's gains. Despite persistent inflows, the rupee's further march may be at the behest of RBI.